Steady growth in the business line to create an intelligent product platform enterprise

Huaqin Technology is a platform-based company specializing in R&D, design, manufacturing and operation services of smart hardware products. It mainly serves consumer electronic mobile phones, personal home digital terminals, laptop computers, data servers, automotive electronics and other markets. The company's operations are steady, and the product line is gradually expanding, starting with the initial mobile phone products, gradually expanding to the tablet, laptop, wearable and server sectors, and the revenue scale expanded rapidly. From 2019 to 2023, the company's revenue was 35.3 billion yuan, 59.9 billion yuan, 83.8 billion yuan, 92.6 billion yuan, and 85.3 billion yuan, respectively. From 2019 to 2023, the compound revenue growth rate was about 24.7%; in terms of profit, the company returned to its mother Net profit increased from 0.51 billion yuan in 2019 to 2.71 billion yuan in 2023, with a compound growth rate of about 52.1%. The company has maintained a high level of R&D investment. Since 2018, the R&D cost rate has remained above 4%. In the first half of 2024, R&D investment reached 2.28 billion yuan, and the R&D cost rate reached 5.8%.

AI empowers terminal products and promotes growth in multiple directions

Since 2023, generative AI applications, represented by ChatGPT, have triggered explosive growth in computing power demand, driving the AI industry into a period of rapid growth. The development of generative AI technology is expected to gradually increase the computing power demand for mobile phones, laptops, etc., drive innovation and iteration of consumer electronics products, and cultivate new growth points for consumer electronics products. Demand in the consumer electronics industry is expected to gradually recover in the future. In terms of smartphones, Apple released the new iPhone 16 series in September 2024, equipped with a new A18 series chip, and equipped with a larger DRAM. The new models are all equipped with the ability to support AI applications; Android is about to enter an intensive new flagship release period. Just as various manufacturers innovated on the optical circuit a few years ago, we can expect Android to start a new round of competition in AI functionality. As a leading smartphone ODM manufacturer, Huaqin is expected to significantly benefit from industry trends. On the PC side, the AI PC update may bring more opportunities to Huaqin. Compared with other major laptop ODM manufacturers, we believe that Huaqin's advantage is that it can apply advanced technology in mobile phones and other product fields to PC products. Currently, Huaqin Technology's laptop ODM business is in the top four in the world, and its market share continues to expand. The company's AI PC products are mass-produced and shipped one after another. In the future, as AIPC penetration rate increases, the product and service competitiveness brought by the company's comprehensive hardware and software capabilities will continue to increase product value, thus leading to continued growth in performance.

In the server field, the company has developed strong R&D capabilities and manufacturing levels in the field of server ODM. The company has established close partnerships with many well-known domestic cloud vendors and achieved product delivery and sales revenue. The company's data products business has implemented full-stack products such as AI servers, general-purpose servers, storage servers, and switch products.

Investment advice

We expect the company's net profit to be 3.04, 3.62, and 4.12 billion yuan respectively in 2024-2026, with corresponding EPS of 2.99, 3.57, and 4.06 yuan, respectively, and corresponding PE 15.5, 13.0, and 11.4x for the closing price of September 24, 2024. The first coverage gave the company a “buy” rating.

Risk warning

Market demand fell short of expectations; customer expansion fell short of expectations; AI server progress fell short of expectations; and acquisitions fell short of expectations.