Key points of investment

Although affected by exchange and old business in the short term, sales of new machines led to a gradual release of performance. The company achieved revenue of 26.47 billion yuan in the first three quarters, +18% year-on-year, and realized net profit of 1.07 billion yuan, or -20% year-on-year, deducting non-net profit of 1.01 billion yuan, or -3% year-on-year. The Q3 quarter achieved revenue of 9.84 billion yuan, +11% year over month, and realized net profit of 0.51 billion yuan to mother, -0.3% year on year and +87% month on month. The main reasons for the year-on-year decline in profits are: 1. Prices of old models from major customers are reduced, while traditional businesses such as LED are affected by the industry, which affects the company's overall profit margin; 2. Continued high investment in R&D and management expenses, and financial expenses increased due to exchange losses. The reason for the month-on-month increase was due to the sale of new models by major customers, and the increase in order volume. At the same time, gross profit margin and net margin increased from 13% and 3% to 15% and 5%, benefiting from sales of new machines from major North American customers, and a significant increase in profitability.

The recovery in the smartphone market is compounded by the development of AI phones, and FPC volume and price have risen sharply. FPC undertakes the core function of the connection in smart terminals. As functions increase, corresponding modules increase, and battery capacity increases due to increased energy consumption, and smart terminals face the problem of internal space limitations. The line width, number of layers, and processing difficulty of FPC have also increased accordingly, and the value continues to rise. At present, the company has become the main system board supplier for major North American customers, and is deeply tied to it. As the company gradually introduces new models in the future, the value of stand-alone machines is expected to increase further, thereby driving performance growth. At the same time, Q3 entered the peak consumer electronics season, and the increase in mobile phone shipments directly led to an increase in the company's order volume, which led to a high operating rate and a sharp increase in performance over the previous month. With the implementation of Apple Intelligence, the mobile phone terminal switching cycle was brought forward, and the company's ASP increased simultaneously, and performance will also usher in new growth space.

The release of NEV production capacity may become a new driving force for profit growth. The products that the company can currently provide to customers in the field of new energy vehicles include functional structural parts such as FPC and hard boards, vehicle displays, heat dissipation and battery structural parts, car body parts, and shells. In 2023, the company's new energy business achieved revenue of 6.4 billion yuan (+168% year over year), and the revenue volume of this business is expected to increase in 2024 as the penetration rate of new energy vehicles accelerates. Currently, the company can provide key components such as heat dissipation parts, structural parts and exterior parts for new energy vehicles, and is deeply involved in new energy battery projects. At the same time, the new energy auto parts production base in Kunshan has been officially put into operation, focusing on lightweight parts projects, and production capacity is gradually increasing. Revenue is expected to continue to grow with the introduction of low-cost models by North American overseas car companies and the gradual increase in the number of parts offered by the company.

Profit forecast and investment rating: The company has two major “A&T” customers, and two-wheel drive drives the rapid growth of the PCB business. Due to short-term traditional industry drag and exchange losses, we lowered the company's 2024-2025 net profit from 2.1/3 billion yuan to 1.7/2.7 billion yuan. We are optimistic about the company's future soft board business growth and AI demand for the consumer electronics industry chain. We expect net profit to be 3.5 billion yuan in 2026, maintaining the “buy” rating.

Risk warning: AI innovation falls short of expectations, and consumer electronics demand falls short of expectations.