Maxscend released its 3Q24 results. Revenue declined by 23% YoY/1% QoQ to RMB1.1bn, driven by a weaker seasonality as smartphone demand is not showing strong recovery. NP declined by 84% YoY/55% QoQ to RMB71mn, mainly due to GPM erosion (down 4.3ppts sequentially to 37.1%) on 1) fab ramp-up, 2) an unfavorable product mix towards higher module shipments, and 3) USD/RMB FX impacts. NPM dropped to 6.6% from 14.3%/32.1% in 2Q24/3Q23 on lower GPM, higher R&D costs (up 66% YoY) and asset impairment loss. Although Maxscend’s LT growth prospects remain intact, we downgrade the stock to HOLD on ST pain from business transformation (fabless to fab-lite) that weighs on profitability. TP adjusted to RMB86, corresponding to 45x 2025E P/E (vs. 44.5x before).

Unlike a usual peak season in 3Q (40% QoQ growth pre-pandemic in 3Q18/19 and 48% QoQ in 3Q23), quarterly sales were flattish sequentially (-1%), showing a weak market demand. Although we have expected weakness would be a drag to 3Q24 sales, top-line growth was still below our/BBG consensus by 21%/24%. Therefore, we revise down our 2024/25E revenue forecasts by 8%/7%, with FY24/25E revenue growth adjusted to 4.7%/23% YoY.

Module business to be the key driver of future growth. In 9M24, Maxscend saw module revenue contribution increase (43% est. of sales vs. 36% in 2023) to ~RMB1.4bn. We expect module share to increase further to 49%/55% in 2024/25E, as we believe modulization in RFFE industry has become a mainstream trend providing a more integrated solution.

GPM is expected to recover to 40%+ in 2H25. We expect margin to face ongoing challenges in the next 2-3 quarters, due to capacity ramp-up at Xinzhuo and utilization not yet achieving the optimized level (slow recovery in demand). The margin headwind may persist at least into 1H25 as the company continues to transfer products fabrication to its own production line (est. RMB137mn depreciation in 4Q24E and a total of RMB550mn in 2024E per mgmt.). We cut GPM estimates by 1.9ppt/1.1ppt for 2024/25E.

Downgrade to HOLD, with adj. TP at RMB86, based on 45x 2025E P/E (close to peers’ avg. of ~41x 2025E P/E). We believe Maxscend must endure the trials of transformative business model shift through challenges before shining bright again on the global stage. Key upside risks: 1) faster- than-expected recovery in demand and share expansions and 2) depreciation’s less severe impacts on margins; key downside risks: 1) slower-than-expected capacity ramp-up, 2) weak recovery in demand, and 3) escalating geopolitical tensions.