The company announced the third quarter results: revenue of 718 million yuan, an increase of 23.6% year-on-year and 17.0% quarter-on-quarter; The net profit attributable to the parent company was -111 million yuan, a year-on-year decrease of 51 million yuan and a month-on-month decrease of 33 million yuan. In the first three quarters, the company achieved revenue of 1.650 billion yuan, a year-on-year decrease of 6.5%; The net profit attributable to the parent company was -396 million yuan, a year-on-year decrease of 262 million yuan. Due to the strong demand in the company's computing power-related fields and the recovery of demand in the consumer field, the company's Q3 revenue achieved good growth. In the case of a decrease in the expense ratio, the company's net profit attributable to the parent company decreased year-on-year. We are optimistic about the company's forward-looking investment and technology advantages in strategic areas such as AIGC and Chiplet in the medium to long term, and maintain our "buy" rating.

IP business: Q3 licensing revenue increased significantly quarter-on-quarter, and AI demand drove revenue growth in GPU/NPU and other revenues Q3 The company's IP licensing business revenue was 243 million yuan, an increase of 99.6% year-on-year and 32.4% quarter-on-quarter.

Among them, the income from intellectual property licensing fees was 2.18 yuan, an increase of 132.8% year-on-year and 36.4% month-on-month. We believe that the market demand for AI computing power and other products is the core driving force, and the company's demand from data processing, device-side AI and other fields has increased, and the revenue of GPU/NPU/VPU has grown rapidly, and the revenue related to AI computing power accounted for 48.59% of the total revenue of IP intellectual property licensing business in the first three quarters. Royalty revenue was relatively stable, with Q3 increasing by 3.68% quarter-on-quarter. In the medium to long term, we are optimistic that VeriSilicon will continue to benefit from the AIGC wave and the chiplet trend. VeriSilicon's NPU IP has been used by 72 customers in 128 AI chips in various market segments, and the demand for AI-related IP such as GPGPU/NPU IP is expected to maintain a rapid growth trend in the future.

Customization business: Q3 design business has recovered significantly, and mass production business is expected to maintain recovery Q3 The company's chip customization business revenue was 474 million yuan, an increase of 3.6% year-on-year and 10.9% month-on-month.

Among them, the demand for chip design business has recovered significantly, with revenue of 238 million yuan in Q3, an increase of 81.5% year-on-year and 23.2% month-on-month, which we believe is mainly due to the growth in demand for advanced process design service projects of 14nm and below, and more large-scale projects have been implemented in Q3; The mass production business achieved revenue of 236 million yuan, an increase of 0.8% from the previous quarter. From the end of 2023, the inventory situation of downstream customers has improved significantly, and the company's orders in hand have remained high for four consecutive quarters, with orders in hand of 2.138 billion yuan as of 3Q24, and the conversion ratio of orders in hand within one year is 78%, and the company's future revenue foundation is solid. In the first three quarters, the company's mass production business signed new orders amounted to 597 million yuan, a year-on-year increase of more than 300%, and it is expected that short-term revenue is expected to maintain a recovery trend.

Target price of 67.27 yuan, maintain "buy" rating

Considering the company's short-term AIGC and other strategic project investment increases, we lower the 24/25/26 net profit attributable to the parent company forecast to -4.34/0.03/0.90 million yuan (previous value: -2.12/0.09/105 million yuan). The valuation of chip customization/IP licensing business is 6.5/23.0x 25E PS (the average consensus expectation of comparable companies is 4.4x/18.7x, and the premium is mainly based on VeriSilicon's A-share scarce target and significant competitive advantage in the HPC/AI field), and the corresponding target price is 67.27 yuan, maintaining a "buy" rating.

Risk warning: the risk of R&D failure, the risk that the localization process is less than expected, and the risk of macroeconomic downturn.