Performance summary: In the first quarter of 2023, the company achieved revenue of 190 million yuan, a year-on-year decrease of 27.4%, and the net profit of the mother was -0.5 billion yuan, turning negative year-on-year.

The sharp rise in R&D expenses briefly dragged down profit performance. First quarter of 2023:1) On the revenue side, the company achieved revenue of 190 million yuan, a year-on-year decrease of 27.4%. 2) On the profit side, the company achieved net profit of -0.5 billion yuan to the mother, turning negative year over year. The company's gross margin for the first quarter of 2023 was 37.3%, up 1.3 pp year on year; net interest rate was -27.2%, down 34.1 pp year on year. 3) On the cost side, the company's sales expense ratio was 3.2%, up 1.8PP year on year; management expense ratio was 7.3%, up 4.0PP year on year; R&D expense ratio was 56.6%, up 29.1PP year on year, mainly due to a sharp increase in R&D expenses caused by a new generation of PHOENIX product R&D films.

The share of the PHOENIX series increased, and downstream demand weakened slightly in the first quarter. The company's gross margin showed an upward trend throughout 2022, mainly due to the release of profits driven by the increase in the proportion of PHOENIX high-end product shipments. Looking at the first quarter, the company's revenue and profit sides both declined to a certain extent, mainly due to weak demand in the downstream communications and industrial control fields, and the company's price cuts for EAGLE, ELF and other series products. We expect the company's revenue and profit side to recover in the second half of the year as new products are successfully introduced to downstream customers and downstream demand recovers cyclically.

The company's high-end product layout continues to improve, and it is expected that domestic substitution in the FPGA field will accelerate in the future. The company continues to promote the high-end layout and diversification of its products. In 2022, it launched 6 new FPGA and FPSoC products to improve the product matrix. Among them, 2 automotive-grade FPGAs were successfully launched, further increasing the automotive sector. FPSoC is expected to drive shipment growth after the cyclical recovery in consumer electronics demand. In the future, the company will focus on promoting the layout of high-end FPGA products. It is expected to launch more than 600KK products in 2023 to accelerate the domestic replacement process in the FPGA field. Technically, in the future, the company will continue to accelerate the deployment of advanced processes and highly integrated FPGA chip technology to meet the needs of downstream high performance, high capacity, low power consumption, and complex heterogeneous markets. It is expected that it will continue to lead the development of the domestic FPGA industry in the future.

Profit forecasts and investment recommendations. We expect EPS to be 0.09 yuan, 0.31 yuan, and 0.55 yuan respectively in 2023-2025, and the corresponding dynamic PE will be 553 times, 159 times, and 91 times respectively. The compound growth rate of net profit to the mother is expected to reach 54.4% in the next three years. We gave the company 18 times PS in 2023, corresponding to the target price of 63.46 yuan, covering the “buy” rating for the first time.

Risk warning: Risks such as product development falling short of expectations and downstream demand falling short of expectations.