Event: The company announced on August 29, 2023H1 achieved revenue (1,796 million yuan, +5.52%), net profit margin (449 million yuan, -15.32%), gross profit margin (67.10%, +2.11pcts), net profit ratio (25.83% 6, -5.98pcts); 23Q2 achieved revenue (987 million yuan, +6.51%, +21.93% month-on-month 6), net profit margin (26130%, -12.30%, +38.64% month-on-month), gross profit margin (26130%, -12.30%, +38.64% month-on-month), gross profit margin (67.10%, +38.66%) 67.38 %, yoy +1.20pcts, month-on-month +0.60pcts), net profit margin (27.30%, y-o-y -5.44pcts, month-on-month +3.27pcts),

An important supplier that pioneered the development of billion-scale FPGA chip products in China: The company's main business is the design, development and testing of large-scale integrated circuits, and providing customers with system solutions. In the field of security and identification chips, the company's product line has a complete range of product categories, and is widely used in the fields of identification, financial payment, intelligent links, anti-counterfeiting traceability, cold chain management, industrial control, automotive electronics, etc.; in the field of non-volatile memory, the company has formed three product lines: EEPROM and NorFlash.nandFlash. The county has a complete niche non-volatile memory product structure; in the field of smart meter chips, the company's product line covers smart meter MCU and general MCU products, and has various types of chip products such as ultra-low power consumption, high precision, power carriers, etc., to achieve product platformization and serialization, and is widely used in smart meters, smart home appliances, automobile bodies, and comfort systems. In the FPGA field, the company's product line has a series of serialized hyperscale heterogeneous integrated programmable logic device products, breaking through key technologies such as hyperscale FPGA architecture technology, programmable device compiler technology, multi-protocol ultra-high speed serial transceiver technology, heterogeneous intelligent computing architecture technology, high-reliability programmable device technology, and full-process EDA technology for large-scale programmable devices. The corresponding FPGA products have been applied in batches.

The advantages of industrial layout were highlighted, and gross margin reached a new high in the same period since listing. The company's 2023H1 revenue (1,796 million yuan, +5.52%) continued to grow, and net profit (449 million yuan, -15.32%) declined slightly. In the first half of the year, the semiconductor industry was still in the downward phase of the industry cycle, consumer demand for electronic products was weak, but thanks to the company's broad product line, the industrial layout advantages were obvious. Sales of FPGA products and non-volatile storage products with high gross margin increased sharply, boosting the company's gross profit margin in the first half of the year (67.10%, +2.11pcts), which reached a new high during the same period, and guaranteed the company's overall performance growth. Looking at 2023Q2 alone, the company's revenue (987 million yuan, +6.51% yoy, +21.93% month-on-month) and gross profit margin (67.38%, y-o-y +1.20pcts, +0.60pcts month-on-month) increased significantly year-on-year. The gross margin reached a new quarterly high, and the company maintained strong profitability. Looking at specific sectors: the security and identification chip sector, 2023H1 revenue (410 million yuan, 11.14% year over year) declined slightly, mainly affected by the downturn in the semiconductor market, but the company focused on expanding new application fields, launched ultra-high frequency EPC tags and achieved mass production at the level of 10 million. Breakthroughs were made in various projects such as anti-counterfeiting security chips and automotive readers, which are expected to expand the market and achieve performance growth in the second half of the year; the smart meter chip sector's revenue (113 million yuan, -59.13% year over year) declined sharply, mainly in the first half of the year, power grid systems and consumer market stocks were digested Due to the cycle and weak demand, the company has increased R&D investment in automobiles, smart home appliances, industrial control, etc., and launched automotive MCUs and low-power MCUs suitable for BLDC click-drive applications. High-performance MCUs and other products based on the Arm China Star core are expected to expand the MCU application field and open up a new growth curve.

In the non-volatile storage sector, revenue (586 million yuan, +20.40% year-on-year) increased, mainly because the company's memory products had stable performance and wide application range, and maintained a strong level of growth during the downturn in the industry; in the FPGA and other product sectors, revenue (576 million yuan, +52.36% year-on-year) increased sharply, mainly because the company's technology cluster advantages in the FPGA field were highlighted, building core technical barriers, and obvious competitive advantages.

The sales expense ratio reached a new high during the same period, and the company increased market expansion: 2023H1 had a slight increase in the three-rate rate (10.49%, +1.48pcts year on year). In particular, the sales expense ratio (6.81%, +1.06pcts) grew rapidly, the highest in the same period since listing. The management expense ratio (4.12%, +0.60pcts) increased slightly, while the financial expense ratio (-0.44%, -0.19pcts) declined. Specifically, sales expenses (122 million yuan, +25.05%) and management expenses (74 million yuan, +23.6696) have all increased, mainly due to the expansion of the company's operating scale, increase in personnel, and salary adjustments, which is a normal increase. The reduction in financial expenses (-$0.8 billion, -82.74%) was mainly due to an increase in net exchange earnings compared to the same period last year.

R&D investment has increased dramatically, and R&D projects have been implemented to enrich the product line: The company continued to increase R&D investment in 2023H1 (588 million yuan, +47.549% 6), and the R&D team (964 people, +16.7% year-on-year) continued to expand, with a master's degree or above accounting for 58.20%. Continuously increasing R&D investment ensures that the company's core technology is in a leading position in various fields, and new high-tech and technological achievements are constantly emerging. In terms of security and identification chips, the company has launched a variety of IoT security chips and carried out technical layout in the field of sensing. Combining the company's security and RF technology advantages, the company promotes security solutions that support security chips, sensor chips, and RF chips. In terms of non-volatile memory, the EEPROM field has launched a series of products with high performance specifications and vehicle specifications. Products in the NORFLASH field are being genealized, and the SLCNAND field is promoting product design and mass production of new process standards. In terms of smart meter chips, MCU products have completed the development and distribution of 12-inch 55nm and 90nm embedded flash memory process platforms. In terms of FPGA products, we have successfully developed [Yiguang] grade FPGAs and heterogeneous integrated programmable system-on-chip (PSoC) chips, as well as integrated field programmable (FPGA) and... artificial intelligence (AD) reconfigurable chips (FPADs) for artificial intelligence applications. Related products have been mass-produced. Ongoing R&D projects continue to enrich the company's product line and continuously open up new growth curves for the company.

Actively prepare goods to meet industrial recovery: 2023H1 company's inventory (2,848 billion yuan, +92.03% at the beginning of the period) increased significantly. The main thing is that the company has greatly increased the inventory of FPGA products and is actively preparing for the recovery of the industry. Specifically, raw materials (945 million yuan, +214.49% yoy), products (1120 million yuan, +50.92% yoy), and inventory products (77.70% yoy) all increased dramatically. As the company stocks raw materials, products, and inventory products, the production and sales of products in stock, the transition to profit statements in the future will greatly increase performance. In terms of the cash flow statement, the company's net increase in cash and cash equivalents (-384 million yuan, compared to -34.32% 6 at the beginning of the period) declined, mainly due to a sharp decrease in operating activity cash flow (-1,090 million yuan, 43133%) due to a sharp increase in payment payments to suppliers due to the company's stocking.

Plans to issue 2 billion convertible bonds to help advance R&D projects: The company announced on April 28 that it will issue no more than 2 billion yuan of A-share convertible corporate bonds to unspecified targets. The capital raised will be used to advance R&D projects such as next-generation FPGA platform development and industrialization projects, intelligent reconfigurable SoC platform development and industrialization projects, new process platform memory development and industrialization projects, new high-end security controller development and industrialization projects, and passive IoT basic chip development and industrialization projects.

Investment suggestions: The company is a core supplier in the field of hyperscale integrated circuits, with technical cluster advantages, rich product lineage, and strong R&D capabilities. We believe: 1. The company has built core technical barriers in the FPGA product field, consolidating competitive advantages. Billion-level FPGA products and the newly released AI engine heterogeneous intelligent PSoC product FPAI will further enrich the company's product series lineage and become a new growth point in the company's FPGA sector; 2. The company has strong scientific research capabilities. It has strong scientific research capabilities in the fields of security and identification chips, non-volatile memory, smart meter chips, and FPGA A number of high-level innovation platforms and technological qualifications, along with the implementation of scientific research projects, the company's product lineage lineup will continue to be enriched, and will occupy a larger market share with the advantages of product clusters; 3. Security and identification chips, non-volatile memory and smart meter chip products are widely used. As the company vigorously expands the application of products in industrial control, automobiles, smart home appliances, etc., future market demand is expected to expand further, opening up a new performance growth curve.

We expect the company's revenue for 20232025 to be 4,046 billion yuan, 5.019 billion yuan and 6.07 billion yuan respectively, net profit of 1.06 billion yuan, 1,461 billion yuan and 1,588 billion yuan respectively, and EPS of 1.35 yuan, 1.79 yuan and 228 yuan respectively. We give a “buy” rating, with a target price of 60 yuan, corresponding to the 2023-2025 forecast of 44 times, 34 times and 26 times PE of EPS.

Risk warning

Risk of falling inventory prices, new product development falling short of expectations, market demand falling short of expectations, etc.