3Q23 performance is in line with our expectations

The company announced 3Q23 results: revenue was 6.223 billion yuan, up 44.35% over the same period last year; net profit was 215 million yuan, from loss to profit compared with the same period last year. The performance was in line with our expectations but exceeded market expectations, mainly due to the recovery of downstream demand and the increase in the proportion of new products. 3Q23 gross profit margin reached 21.78%, a month-on-month increase in 4.48pct, we think this is due to the company inventory demurrage is coming to an end, the proportion of new products has increased.

Trend of development

3Q23 revenue increased significantly compared with the same period last year and month-on-month, while net profit turned from loss to profit. We believe that the main reason is that demand in various market segments (including the mobile phone and automobile markets) has gradually recovered since the third quarter, and the company's revenue from semiconductor design business has increased significantly with the help of new products. At present, the company's 3Q23 gross profit margin is 21.78%, up 4.48pct from the previous month, but still down 6.65pct from the same period last year. Looking forward to the fourth quarter, we believe that with the continuous release of models with the company's new products and the enhancement of the low-cost effect of contract manufacturing in the second half of the year, we expect the company's profitability to maintain month-on-month improvement.

The company actively promotes the elimination of inventory, and the progress of inventory removal has greatly exceeded market expectations. The company's 3Q23 inventory has dropped to 7.552 billion yuan, which is 23.16% lower than 2Q23's 9.828 billion yuan month-on-month (2Q23 is only 9% lower than 1Q23). The inventory burden has been greatly reduced, and the progress of removing the warehouse has greatly exceeded market expectations. We think it reflects the strong recovery of 3Q23 market demand compared with the previous month, and the mass production of the company's new products is smooth. We expect that the inventory of the company's 64MP and other old products will end by the end of this year, and the overall inventory level will drop to about 6 billion yuan by the end of the year. We believe that the end of going to the warehouse is conducive to the repair of product prices in the CIS industry, and we are optimistic that the price of mobile phone CIS will stop falling and rebounding next year, and the industry as a whole is expected to usher in profit repair.

Grasp the direction of technological development of the industry, high, middle and low-end layout is comprehensive. In the first three quarters of 2023, the company's semiconductor design business R & D expenditure was about 1.562 billion yuan, the R & D expenditure rate was about 10.4%, and the R & D investment remained stable. The company has launched high-order pixel products with different pixel sizes, including 50H and 50e for the mobile phone market, with a focus on the large pixel market of more than 1.0um. We believe that in the high-end pixel market this year and next, the company's domestic replacement for overseas competitors will become the main line. In the small pixel technology, the company through the industrial chain transfer to improve the performance-to-price ratio, is expected to further expand the share.

Profit forecast and valuation

We keep our profit forecast unchanged, with revenue forecast of 2,825,212 million yuan and net profit forecast of 3.416 billion yuan for 23max for 24 years. The current share price corresponds to a price-to-earnings ratio of 35.5 times 2024. Considering the bottom of the industry boom and the smooth development of the company's new products to ensure long-term growth, we maintain the target price of 129 yuan, corresponding to the price-to-earnings ratio of 44.6 times earnings in 2024, which is 26% higher than the current stock price.

Risk

The recovery of consumer electronics demand is not as expected; the development of emerging markets is not as good as expected; and the pace of mass production of new products is not as fast as expected.