This report guide:

The company's 24Q4 core indicators gross profit margin and capacity utilization rate are improving, 25Q1 revenue is expected to maintain strong growth, and downstream demand benefits from AI, automotive electronics localization, and consumer electronics policies, which are expected to continue to grow.

Investment Highlights:

Maintain Overweight rating and raise TP to $140. In the fourth quarter, the company's product structure was optimized, the gross profit margin continued to increase, and the company actively expanded production and continued to make capital investment. Referring to the Q4 2024 earnings report, we slightly lowered our EPS for 2024/2025/2026 to RMB0.46/0.71/0.91 (previous value of RMB0.56/0.72/0.92) after taking into account the impact of depreciation. The company has the scarcity of advanced process production lines, and benefits from the continuous expansion of production lines and independent and controllable catalysis. Since foundry is an asset-heavy industry, capital expenditure is front-loaded and will gradually be reflected in capacity and revenue growth, so we choose PB as the valuation method. Referring to the comparable industry valuation of Chinese mainland companies of 2.5 times PB and the global foundry leader TSMC PB of 8.2 times, the company is given 7.4 times PB in 2025 and raised the target price by 140 yuan (the previous value was 136.8 yuan).

24Q4 revenue was in line with expectations, gross margin beat expectations, and 25Q1 revenue guidance exceeded expectations. The company's revenue in 24Q4 was 15.9 billion yuan, +31% year-on-year, in line with expectations. The gross profit margin was 22.6%, which was higher than the upper limit of the company's guidance (18~20%), exceeding market expectations. Total profit was $2.7 billion, +64% YoY, driven by an increase in the number of wafers sold, an increase in capacity utilization, and a change in product mix. The net profit attributable to the parent company was 992 million yuan, a year-on-year increase of -13.5%, and the interests of minority shareholders increased significantly. In 25Q1, the company's revenue guidance increased by 6-8% quarter-on-quarter, which was better than market expectations in the off-season, and the gross margin is expected to be 19-21%. For the full year 2025, the company is guiding sales revenue growth above the average for comparable companies.

Continue to promote the construction of 12-inch production lines, and downstream demand is improving. In 2024, the company's capital expenditure will be US$7.33 billion, with a monthly production capacity of 948,000 pieces equivalent to 8-inch standard logic at the end of the year, a total shipment of more than 8 million pieces, and an average annual capacity utilization rate of 85.6% (85.5% in Q4). The

proportion of 12-inch wafer shipments increased to 80.6% in the fourth quarter, and the unit price of wafers increased in the fourth quarter due to the improvement of revenue structure, with ASPs of 8-inch wafers equivalent in 24Q1/Q2/Q3/Q4 being $907, 836, 966, and $1025. The company's guidance for 2025 capital expenditure is broadly unchanged from the previous year, exceeding market expectations and is expected to drive equipment demand. In 2025, the company's AI demand is expected to continue to maintain rapid growth, while the demand for non-AI is also expected to grow flat or moderately.

Catalysts: Gradual recovery in demand; Semiconductor independent and controllable catalysis

Risk warning: demand is less than expected; The company's product verification is less than expected, and market competition is intensifying