Shennan released its FY24 results. Revenue went up by 32.4% YoY to RMB17.9bn, 2%/7% above our estimate/BBG consensus. Net profit rose by 34.3% YoY to RMB1.9bn, in-line with our estimate but 2% below BBG consensus.

During the period, GPM was 24.8% (vs. 23.4% in FY23), showing gradual improvement as demand recovered but offset by new factory ramp-up. We revise up our revenue forecasts by 15%/21% for FY25/26E, reflecting 1) higher utilization (~90% for 1Q), 2) higher-than-expected DC/AI-related revenue as domestic Cloud companies increase capex budget and 3) better auto PCB revenue growth as high-end autonomous driving systems may have faster-than- anticipated penetration. Meanwhile, we revise up our NP estimates by 12%/16% in FY25-26E, partially offset by lower GPM estimates considering the continuous capacity ramp-up of Guangzhou factory with costs from equipment, labor and raw materials now recognized in COGS as production ramps up. Upgrade to BUY,with new TP of RMB146.81 (previous: RMB115), implying a NP CAGR of 28.5%and PEG of 1.1x during 2024-26E.

PCB sales grew by 30% YoY to RMB10.5bn, driven by robust demand indata centers (20% YoY) and auto (~14% of total sales), despite a telecom decline (contributing to less than 40% of total PCB sales in FY24). PCB GPM improved to 31.6% in FY24, compared to 26.6% in FY23, reflecting higher capacity utilization and an enhanced product mix consisting of more AI- related products. PCBA segment increased by 33.2% YoY, also driven by robust data center and auto sales, with a stable GPM of 14.4%. We expect the segment revenue to grow 25% YoY in 2025, driven by strong growth in DC/auto markets (domestic AI capex and higher penetration of autonomous driving vehicles). We project GPM will be stable at current ~31% level.

Substrate sales grew by 37.5% YoY to RMB3.2bn. The growth weightedmore towards 1H24 as demand was strong due to inventory restocking behaviors. The segment experienced margin pressure (18.2% in FY24 vs. 23.9% in FY23) due to capacity ramp-up, rising material costs (specifically gold price, which surged by more than 20% in 2H24, per mgmt.), and weaker BT substrate demand in 2H24. Excluding the impact of the initial capacity ramp-up of Guangzhou factory, BT substrate’s GPM in 2H would have been 2ppts lower compared to 1H (instead of 10ppts drop). We expect substrate revenue to grow by 18% YoY in 2025E, led by higher growth in memory products as demand recovers. GPM may rise modestly to 19.5%, considering the ongoing ramp-up dilution, in our view.

Upgrade to BUY, with new TP of RMB146.81. The new TP is based on 5-year avg. historical forward PE of 31.0x. We believe SCC performed better than expected during the sectoral downcycle. Looking forward, the company is set to ride the tailwind of domestic localization with its leading position in PCB market and capacity addition from its FC-BGA substrate line.