Core views
The decline in profit exceeded the decline in revenue due to weak industry demand in the first half of the year, the decline in company revenue, and large investment in sales and R&D. However, the company's product and client layout is progressing smoothly, and the automotive and overseas markets have achieved good growth. In the future, with the recovery of the global economy, performance is expected to gradually resume good growth. AI, edge computing, etc. are expected to bring new opportunities to the IoT module industry. The company continues to increase investment in the fields of computing power modules and intelligent modules, which is expected to bring new flexibility. Driven by changes in the product structure, gross margin increased relatively well in the first half of the year, and future profitability is expected to increase.
occurrences
The company released its semi-annual report for 2023. In the first half of 2023, it achieved revenue of 1,023 million yuan, a year-on-year decrease of 8.97%; net profit to the parent group was 48.65 million yuan, a year-on-year decrease of 43.56%.
Brief review
1. Weak overall demand affects performance, and automotive and overseas markets are growing well.
The company released its semi-annual report for 2023. In the first half of 2023, it achieved revenue of 1,023 million yuan, a year-on-year decrease of 8.97%; realized net profit of 48.65 million yuan, a year-on-year decrease of 43.56%; realized net profit of 24.19 million yuan after deduction, a year-on-year decrease of 48.75%.
The decline in the company's revenue in the first half of the year was mainly due to the fact that demand from the company's traditional IoT industry customers and FWA customers was still weak against the backdrop of a slow recovery in the global economic environment.
The decline in the company's profit in the first half of the year exceeded the decline in revenue. It was mainly due to a year-on-year increase in R&D and sales expenses of 36.1 million yuan, a year-on-year increase in credit and asset impairment losses of 9.38 million yuan, an increase in the fair value of foreign investment, and a year-on-year decrease of 14.55 million yuan in non-recurring profit and loss amounts such as government subsidies.
Looking at the breakdown, revenue from wireless communication modules and solutions in the first half of the year was 993 million yuan, down 7.81% year on year; other business revenue was 30.41 million yuan, down 35.36% year on year. In the three major application areas of intelligent connected vehicles, FWA, and traditional IoT, the revenue of the intelligent connected vehicle business has more than doubled. Demand for FWA business and traditional IoT business is weak, but the company's overseas expansion is progressing smoothly. FWA continues to win bids and launch R&D projects in Europe, North America, and Japan. Cooperation with leading industry customers in the IoT field is developing well in North America, Japan, Europe, etc. In the first half of the year, the company's domestic business revenue was 705 million yuan, down 16.99% year on year, and overseas business revenue was 318 million yuan, up 15.90% year on year. The company's share of overseas business increased in the first half of the year, reaching 31.06%, an increase of 6.66 pct over the same period last year.
In the second quarter of 2023, the company achieved revenue of 580 million yuan, a year-on-year decrease of 19.82%, and a year-on-year increase of 30.86%; realized net profit of 30.52 million yuan, a year-on-year decrease of 50.46%; and realized net profit of 11.21 million yuan after deducting non-return income, a year-on-year decrease of 58.02%.
2. Gross margin increased year-on-year, and sales and R&D expenses increased significantly.
The company's comprehensive gross profit margin for the first half of the year was 20.41%, an increase of 2.51 pct over the previous year. Among them, the gross profit margin of the wireless communication module and solution business was 20.81%, an increase of 2.97 pct over the previous year. Looking at the subregion, the domestic gross profit margin was 19.86%, up 2.09 pct from the previous year; the overseas gross profit margin was 21.62%, up 3.33 pct from the previous year. The increase in gross margin was relatively good, mainly due to changes in the product structure. In the first half of the year, the share of high-margin products shipped by the company's vehicles, high computing power, and overseas customers increased, while shipments of NB and CAT1 products with relatively low gross margins declined.
The company continued to increase R&D and market investment, and sales expenses and R&D expenses increased significantly in the first half of the year. In the first half of the year, the company's sales expenses were 29.12 million yuan, an increase of 48.47% over the previous year. The main reason was that the company increased its focus on terminal car manufacturers, leading Tier 1, drones, servers, and overseas customers. In the first half of the year, the company's R&D expenses were 103 million yuan, an increase of 34.59% over the previous year. The main reason is that the company continues to increase investment in 5G smart cockpits, 5G smart T-boxes, and high-computing power AI modules. In the first half of the year, the company's management expenses were 26.82 million yuan, an increase of 9.02% over the previous year. The company's financial expenses in the first half of the year were 2.58 million yuan, a year-on-year decrease of 68.04%. Of these, the exchange gain was 2.55 million yuan, and the loss for the same period last year was 1.89 million yuan.
3. The automotive business doubled in the first half of the year, products continued to iterate, and customers progressed smoothly.
Revenue related to the company's intelligent connected vehicle business more than doubled in the first half of the year. The company's first-generation and second-generation 5G smart module products for smart cockpits have been mass-produced on a large scale on many mainstream customer models, and third-generation 5G smart module products have also been shipped in small quantities on high-end models of terminal brands.
Intelligent module products with higher computing power will also expand in the direction of advanced driving assistance in the future, opening up space for linkage between the cockpit domain and the driving domain. On the customer side, the company cooperated closely with major terminal customers, completed multi-brand and multi-model product adaptation, and continued to increase its share. At the same time, it is also progressing smoothly among joint venture brands, new car builders, and TIER1 manufacturers. According to the company's official account information for July, the company and leading domestic Tier 1 manufacturers are based on the company's in-vehicle smart module (equipped with Qualcomm? The smart cockpit solution created by (QCM6125 chip platform) has successfully obtained a cockpit domain controller project target from a leading new car builder in China. Currently, it has officially entered the product development stage and will be installed on mainstream SUV models of terminal car manufacturers. In the future, with the further acceleration of automotive intelligence and continuous breakthroughs in the company's products and customers, the automotive business is expected to continue to grow well.
4. The product array of computing power modules and intelligent modules continues to be enriched, and many emerging industries are forward-looking.
The AI model is expected to gradually sink to the terminal side, and edge side computing power requirements are increasing, which will drive demand for intelligent modules and computing power modules. The medium to long-term drive can be expected optimistically. The company is actively building products, launching the latest intelligent module products in the industry based on Qualcomm's second-generation Snapdragon 8 chip. It is the first in the industry to launch a high computing power module with a comprehensive AI computing power of 48T. Intelligent modules and computing power modules equipped with strong hardware capabilities and AI capabilities continue to expand in emerging industries such as automobiles, cloud servers, industrial Internet machine vision products, drones, and robots. In the future, with the upgrading of informatization intelligence throughout the industry and the development of the artificial intelligence industry, the company's computing power modules and intelligent module products have broad room for growth.
5. Profit forecasts and investment suggestions.
Due to weak industry demand in the first half of the year, the company's revenue fell 8.97% year on year, and large investment in sales and R&D, etc., return profit fell 43.56% year on year, and the decline in profit exceeded the decline in revenue. However, the company's product and client layout is progressing smoothly, and the automotive and overseas markets have achieved good growth. In the future, with the recovery of the global economy, performance is expected to gradually resume good growth. AI, edge computing, etc. are expected to bring new opportunities to the IoT module industry. The company continues to increase investment in the fields of computing power modules and intelligent modules, which is expected to bring new flexibility. Changes in the product structure led to a good increase in gross margin in the first half of the year, and future profitability is expected to increase. We expect the company's revenue from 2023 to 2025 to be 2.35 billion yuan, 3.08 billion yuan, and 3.91 billion yuan, respectively, net profit of 120 million yuan, 180 million yuan, and 250 million yuan respectively. The corresponding PE is 60x, 41x, and 29x, respectively, maintaining the “buy” rating.
6. Risk warning. Changes in the macroeconomic environment affect demand. Weak downstream demand for vehicles, FWA, and pan-IoT causes the company's business development to fall short of expectations; increased competition in the industry affects the company's supply share in major customers, or causes the company's gross margin to decline; the company's product iteration falls short of expectations or the transformation of R&D investment results falls short of expectations, affecting the company's product sales; shortages of raw materials such as chips and price increases exceed expectations, causing the company's gross margin to fall short of expectations; large exchange rate fluctuations affect the company's financial expenses and procurement costs, thereby affecting the company's net profit margin; Progress in supply chain optimization and cost control fell short of expectations; changes in the international environment affected the company's supply chain security and overseas expansion, etc.