Incident: The company released its 2022 annual report and the 2023 Yili Report. During the reporting period, the company achieved operating income of 1,042 million yuan, an increase of 53.57% over the previous year, achieving net profit of 598.28 million yuan and net profit of 7.317 million yuan after deducting non-return mother net profit of 7.317 million yuan, turning a loss into a profit over the previous year; Company 2301 achieved operating income of 188 million yuan, a decrease of 27.38% over the previous year, achieving net profit of 51.011 million yuan, a decrease of 388.3% over the previous year.

The company's 2022 performance increased sharply year-on-year, turning a loss into a profit. The first quarter of '23 was affected by downstream demand and was under short-term pressure. In 2022, the company continued to enrich the product matrix, continuously optimize product performance, and expand product application fields. Customer demand continued to grow. Furthermore, the company's products were continuously optimized, and the increase in sales share of high-margin products led to the company's gross margin growth.

The performance of Company 2301 is under pressure, mainly due to fluctuations in demand cycles in the downstream market. Shipments of the company's mature products have declined, and many new products or models are still in the introduction period. The decline in net profit is mainly due to the company's continued increase in R&D investment, the year-on-year increase in R&D personnel, and confirmation of large R&D investment such as streaming costs. At the same time, it also compounded the impact of the decline in revenue. The company's R&D expenditure rate in the first quarter was 56.6%, a sharp increase over the same period (27.5% in 2201 and 39.3% in 22Q4).

The product line continues to expand, and new products are steadily advancing. The company is a leading manufacturer in the domestic FPGA industry, and has built a product ecosystem for ELF series, EAGLE series, Phoenix series and FPSoC series FPGA chips and Tangdynasty series FPGA special E-DA software. The products cover everything from dozens of cost-effective products to 400K high-end products, and has accumulated deep customer accumulation. In the context of the tense situation overseas, domestic high-end digital chips are expected to replace the acceleration and are worth paying attention to. Looking at the industry, the FPGA circuit is large and the pattern is clear. It is mainly used in the fields of communications, industrial control, consumer electronics, data centers, automotive electronics, artificial intelligence, etc. Currently, the localization rate is still at a low level. In the downstream application market, more and more attention is being paid to requirements such as low power consumption, programmability, low cost, and short development cycles. The FPGA market is growing clearly and there is broad room for development.

FPGA is the core chip for AI computing power. In addition to GPU/CPU, FPGAs are core computing power chips for data centers and cloud computing, which can improve the efficiency of the operation of algorithms. At the same time, in terms of power consumption, it also has better performance compared to GPUs, and will perform better than CPUs. As the amount of data to be processed by systems such as data centers and high-performance computing continues to rise, and the bandwidth required continues to increase, the new “CPU+FPGA” architecture will also be one of the new directions of cloud computing in the future. Faced with exponential growth in computing power demand brought about by the rapid development of A1, domestic FPGA manufacturers are currently in the early stages of development. Subsequent increases in mid-range and high-end shipments are expected to enter a period of rapid performance development.

Investment advice: Considering that the pace of the industry's downstream recovery fell short of expectations, we lowered our early-stage profit forecast. The company's 2023/2024/2025 revenue is estimated to be 15.17, 2325, and 3,089 billion yuan respectively. Corresponding PS is 14, 9, 7 times that the company focuses on the civilian FPGA market, has high technology and customer accumulation in the FPGA field. With the explosion of downstream demand, it is expected that it will use its technological advantages to accelerate domestic FPGA substitution, with both industry growth and scarcity to maintain the “buy” rating.

Risk warning events: 1) FPGA market demand and sentiment may fall short of expectations: 2) Risk of price increases for upstream raw materials; 3) Untimely update of research and usage information: 4) New product development falls short of expectations; 5) Industry competition risk.