Matters:

1) In the first three quarters of 2024, the company achieved revenue of 5.65 billion yuan (yoy +28.56%), net profit to mother of 0.832 billion yuan (yoy +91.87%), and net profit of 0.777 billion yuan (yoy +128.31%) after deducting non-return to mother.

2) The company achieved operating income of 2.041 billion yuan (yoy +42.83%, qoq +2.97%), net profit of 0.315 billion yuan (yoy +222.54%, qoq +0.92%), and net profit of 0.304 billion yuan after deducting non-return to mother (yoy +367.35%, qoq +4.94%).

Commentary:

Downstream demand continues to recover, and performance is growing steadily. In the third quarter of 2024, the company's revenue and net profit increased further. Revenue growth was mainly due to: 1) Flash: Flash revenue grew in single-digit month-on-month in the third quarter, mainly due to further recovery in consumer electronics. 2) MCU: In the context of a poor peak season, shipments remained at a high level in the second quarter, and effective removal of customer inventories in the industrial sector drove demand recovery. Profitability grew steadily, with 24Q3's gross profit margin of 41.77% (yoy+5.41pct, qoq+3.62pct), mainly due to: 1) The company achieved some results in optimizing the cost structure. Over time, the share of some previous high-cost inventory decreased, which helped improve costs; 2) Changes in product shipping structure were also one of the reasons for the month-on-month improvement in gross margin. On the one hand, demand from some high-net-worth customers increased in the third quarter. On the other hand, MCU and Flash products were also actively launched with high performance/high capacity The product enters the field of demand with high specifications and high requirements.

Diversified layout helps steady operation, and technological and product advantages are constantly being enhanced. The company insists on R&D investment and product iteration, continuously enriches the product matrix, optimizes product costs, further enhances the competitiveness of each product line, and implements a business strategy centered on market share: 1) Flash: As the world's No. 2 SPI NOR Flash company, the company's Nor Flash products have been further improved in the layout of large capacity, high performance, high reliability, high safety, low power consumption and low voltage, and small packages to meet the needs of customers in various product applications in different application fields. The company SPI NAND Flash has achieved full product coverage in the fields of consumer electronics, industry, automotive electronics, etc. 2) DRAM: In the first half of 2024, the company's DDR4 8Gb products have been successfully distributed, and samples have been provided to customers. Using 4Gb/8Gb capacity DDR4 and 1Gb/2Gb/4Gb capacity DDR3L, they are widely used in network communications, televisions, set-top boxes, industry, smart homes, etc. 3) MCU: The company is the No. 1 32-bit Arm in China? General purpose MCU supplier. At present, 51 product lines and more than 600 products have been successfully mass-produced, achieving full coverage of mainstream application markets such as general purpose, low cost, high performance, low power consumption, and wireless connectivity. In the first half of 2024, the company continued to diversify its product line and launched multiple series of products, including high-performance products for industrial and other applications, value-added products for industrial and consumer electronics, and low-power products for smart metering.

The DRAM business is progressing rapidly, and inventory is being increased based on long-term development. On October 25, the company issued an announcement to increase the estimated amount of related transactions between the company and Changxin Storage in 2024 based on business development needs and market situation forecasts, from the original estimated transaction amount of 0.12 billion US dollars (about 0.852 billion yuan) to 0.14 billion US dollars (about 0.995 billion yuan) in line with the actual business development situation of the company in 2024. Main departments:

1) The company's niche DRAM performance increased significantly year-on-year in 2024, especially in the first half of the year. Due to the recovery in demand and rising prices, the company's growth momentum was very good. In this context, the company's procurement amount from affiliated companies in the first three quarters was close to the level previously announced, and it is necessary to increase procurement due to operating needs; 2) Currently, the yield of the products sold by the company is relatively stable, and the company hopes to increase its preparation to support continued growth next year.

Investment advice: The company is a domestic NOR Flash and MCU leader, and the DRAM business is progressing steadily. We maintain profit forecast data. We expect the company's net profit to be 1.15/1.62/1.97 billion for 2024-2026. Based on the valuation level of comparable companies in the industry and the company's leading position, the target price is 109.76 yuan for 25 years, maintaining a “strong push” rating.

Risk warning: downstream demand falls short of expectations; new product development and process iteration fall short of expectations; increased market competition