Wingtech announced 3Q24 results: revenue of 19.57 billion yuan (yoy +28.7% /qoq +12.9%) and net profit of 0.27 billion yuan (yoy -67.7% /qoq +9287.1%), mainly due to the launch of laptop products from major North American customers in the ODM business and OEM price adjustments for next-generation products. Excluding interest charges on convertible bonds and exchange fluctuations, the ODM business lost about 0.15 billion yuan in a single quarter, a significant month-on-month loss compared to about 0.42 billion yuan in 2Q24; at the same time, the semiconductor business recorded a gross profit margin of 40.5% in a single quarter, and profitability rebounded to a historically good level. With improved labor efficiency management and cost control, the company's ODM business is expected to turn a loss into a profit in 25 years; at the same time, the semiconductor business is expected to go through the cycle and maintain the purchase rating as overseas demand recovers.

Semiconductor business: Outstanding gross margin performance, recovering to a historically good level

The semiconductor business generated revenue of 3.83 billion yuan in 3Q24 (yoy -4.2% /qoq +5.9%), mainly due to seasonal improvements in the automotive and industrial/new energy markets. However, the gross margin performance was impressive. 3Q24 achieved 40.5% (yoy+2.8pp/qoq+1.8pp), and the downturn cycle lasted more than 23 years (38.59%), mainly due to technology cost reduction and management efficiency increase. The automotive sector accounts for about 60% + of the company's semiconductor business. Relying on the expansion of new products in the domestic NEV market in the first three quarters, it withstood part of the impact of the overseas automotive semiconductor inventory removal cycle and showed a good ability to cross the cycle. Looking ahead to next year, we believe that (1) the removal of overseas automotive semiconductors is expected to come to an end; (2) the company's layout and introduction of high-voltage power products and analog materials such as SiC Mosfets and IGBTs, the company is expected to achieve a year-on-year recovery in revenue growth.

ODM business: the introduction of major customers drives rapid revenue growth, and the business gradually reduces losses

ODM business 3Q24 had revenue of 15.73 billion yuan (yoy 45.6% /qoq +14.8%). Since this year, the company has achieved rapid revenue growth and improved revenue structure by introducing laptop products from major customers and expanding categories such as automobiles and IoT. By adjusting OEM prices with customers, reducing raw material costs, and improving operational efficiency, 3Q24's overall ODM business gross margin reached 3.8% in a single quarter, an improvement of 1.8 pp over the previous quarter. Coupled with exchange losses and interest expenses on convertible bonds, the ODM business lost 0.357 billion yuan in 3Q24. At present, businesses such as mobile phones, tablets, and home appliances have reversed losses, while loss-making businesses such as laptops, vehicles, and IoT are expected to gradually improve profits quarter by quarter as they scale up. We expect to reverse the overall loss of the ODM business in '25.

Due to continuous improvement in profits, the target price was raised to 4.667 billion yuan to maintain the buying rating

Considering the long global automotive semiconductor inventory removal cycle, we lowered our semiconductor business revenue, but with the number of major customers and new products coming online, we raised the revenue from the ODM business, increasing the overall revenue of 2024-2026 by 8.6/9.8/ 10.6% to 71.68/78.57/85.41 billion yuan. Considering the significant improvement in semiconductor profitability but it will still take time to reduce losses in the ODM business, we comprehensively lowered our 2024-2026 gross margin by 1.6/1.1/0.8pp to 10.4/12.1/ 13.2%, and ultimately lowered net profit to mother to 0.87/2.21/3.15 billion yuan. Based on SOTP, 25E semiconductor/ODM business was given 25x/18x PE, optical business was given 1x PB, and the target price was raised to 46.67 yuan (previous value: 37.49 yuan) to maintain “purchase”.

Risk warning: Risk of product expansion and recovery in overseas demand falling short of expectations, risk of impairment of goodwill.