Incident: The company's 1H23 achieved revenue of 1,796 billion yuan, up 5.5% year on year. The increase was mainly due to a rich product line to enhance business resilience. Among them, 1H23's revenue from FPGA chips and other business/non-volatile memory businesses increased 55%/21% year on year, respectively, becoming the main driving force for the company's performance growth, offsetting the 11%/59% year-on-year decline in security and identification chips/smart meter chip business revenue, respectively. On the profit side, 1H23 achieved a gross profit margin of 67.1%, an increase of 2.1 pct over the previous year. The increase in gross margin was mainly due to product restructuring, an increase in the revenue contribution of highly reliable products, and the introduction of new products with higher gross margin; net profit was 449 million yuan, a 15% year-on-year decrease, corresponding to a 25% net interest rate. The decline was mainly due to the company's increase in R&D investment and a 41% year-on-year increase in R&D expenses.
FPGAs maintained a high release rate, and non-volatile memory bucked the trend: 1) FPGA chips and other products, 1H23 achieved revenue of 586 million yuan, an increase of 55% over the previous year. The company can provide 10 million gate level and 100 million gate level FPGA chips and have been applied in batches. PSoC products have also been successfully mass-produced and received multiple customer orders, and released reconfigurable chip FPAI integrating FPGA and artificial intelligence for AI applications; the company is promoting the development of a new generation of 1 billion gate level FPGA products and a new generation of FPGAs based on 1xNMFinFET advanced processes. Considering that the company has technical advantages, the product has accelerated release after verification. Moreover, localized FPGA replacement brings downstream demand. We believe FPGA has brought about downstream demand. The chip and other products business will maintain a high growth rate for 23 years, becoming the main driving force for the company's future revenue growth. 2) Non-volatile memory, 1H23 achieved revenue of 588 million yuan, an increase of 21% over the previous year, mainly due to the company's timely adjustment of the product structure and maintaining a good growth trend in the direction of market demand; the company also actively promotes research and development of niche non-volatile memory based on a new process platform, and promotes high-performance industrial and vehicle grade products to further strengthen the competitiveness of storage products. We are optimistic that the company's memory business will further expand in 2023.
Demand in the consumer electronics market is weak, and the company's civilian goods business may be under pressure in 2023:1H23 security and identification chip business achieved revenue of 410 million yuan, down 11% from the previous year; the smart meter chip business achieved revenue of 113 million yuan, down 59% from the previous year. Considering that both the power grid system and the consumer market are in a digestive inventory cycle, it is expected that the high growth rate in 23 will decline sharply compared to the year 22. Currently, downstream consumer electronics markets such as home appliances, computer peripherals, and networked devices have shown no signs of recovery. The company's security and identification chips, and smart meter chip business performance may be under pressure. The company is actively expanding into applications such as automobiles and the Internet of Things to make up for it.
Profit forecast, valuation and rating: Considering that localized replacement of FPGA chips continues to advance, the company's memory business is expected to continue to expand, but due to the current increase in R&D investment, the net profit forecast for Fudan, Shanghai for 2023-2025 was adjusted to -8%/-1%/+4% to 1,073/13.80/1,708 billion yuan, corresponding year-on-year growth rates of 0%/29%/24%, respectively. The company is the first manufacturer to launch 100 million FPGA products in China, effectively filling the gap in domestic high-end FPGAs. Under the wave of localized substitution, it is expected to further seize the domestic market, and will be in an accelerated release stage in the next three years. Maintain Shanghai's Fudan (H) “buy” rating.
Risk warning: downstream demand for semiconductors falls short of expectations; risk of price cuts for special chips; new product development and technology iteration fall short of expectations.