Key points of investment:

Event: On October 28, 2023, Ziguang Guowei Company released its report for the third quarter of 2023. In the first three quarters, the company achieved operating income of 5.642 billion yuan, an increase of 14.31% over the previous year, and net profit of 2,031 billion yuan, a year-on-year decrease of 0.48%. In the third quarter, the company achieved operating income of 1,907 million yuan, a year-on-year decrease of 6.08%, and net profit of 638 million yuan, a year-on-year decrease of 24.21%.

Incident analysis:

Operating resilience continues to show, and gross margin levels remain stable. From January to September 2023, the company achieved operating income of 5.642 billion yuan, a year-on-year increase of 14.31%; net profit of 2,031 billion yuan, a year-on-year decrease of 0.48%; and net operating cash flow of 1,181 billion yuan, an increase of 3.31% over the previous year. Total assets were 17.305 billion yuan, up 12.89% from the end of the previous year, and business performance progressed steadily after continuing high growth; R&D expenses were 1,045 million yuan, up 38.01% from the same period last year, mainly due to the increase in the company's R&D labor costs; the book value of monetary capital was 2,596 billion yuan, a decrease of 36.15% from the beginning of the year, mainly due to the large net cash outflow from the company's current purchases of short-term capital protected bank wealth management products and large deposit books and share repurchases. The company's gross margin for the first three quarters was 62%, and gross margin remained basically stable. First, the gross margin of the main business sector increased, and second, the scale of operations in the special integrated circuit business, which had a relatively high gross margin, grew rapidly, and its share of operating income increased markedly.

Short-term phased pressure, and long-term value remains unchanged. Affected by the economic environment and industry prosperity, the company's operations are facing phased pressure, but the company's various business operations are normal, orders are generally stable, and the future is gradually improving. The company is a leading company in the field of special integrated circuits. It involves the field of special integrated circuits, the field of intelligent safety chips, and the field of crystal oscillators, which are key links in the development of domestic devices in the future. In the field of special integrated circuits, Ziguang Guowei is in a leading position in the industry with platform-based and serialized products and technical service support. System-level chips represented by special SoPC platform products have been recognized by users, three- and fourth-generation products have been developed, and the company's newly launched high-speed RF ADC was recognized by major users in the first half of the year. In terms of smart security chips, the newly launched first one-stop eSIM solution in China has been introduced to many customers in industries such as mobile POS, smart meters, and logistics; the automotive digital key solution has been introduced to dozens of OEMs and Tier 1 to achieve mass production and loading. In the main business field, the company has competitive advantages and long-term technological accumulation, and long-term value can be expected.

Expand new products in various fields, and the integrated circuit business continues to prepare supplies. Since this year, the company has launched new products in the fields of FPGA, special memory, SoPC, and MCU, and has entered the promotion or customer introduction stage. In terms of special memory, the company continues to maintain the leading position with the most complete series and the most advanced technology in China. The newly developed special NandFlash has been introduced to the market, and a new type of special memory is about to be launched. Research and development of products such as DSP, video chips, and high-speed RF ADCs is progressing smoothly; the company's newly developed high-performance bus products have begun to enter the promotion stage, and various interface products are also being continuously updated, providing network communication airborne bus switching chips for the C919 aircraft. The company continues to improve product categories and increase customer stickiness in the field of special integrated circuits, and new growth points continue to emerge. Inventory and contract liabilities have increased significantly, indicating strong actual downstream demand. As of the third quarter, the company's accounts payable book value was 1,249 billion yuan, an increase of 39.16% over the beginning of the year, mainly due to the continued increase in inventory in the company's integrated circuit business.

Implement business adjustment measures to focus on the main integrated circuit business. According to the company's business development needs, Tangshan Guoxin Jingyuan Electronics Co., Ltd., a wholly-owned subsidiary of the company, transferred 100% of its shares in Tangshan Jingyuan Electronics Co., Ltd. through a public listing through the Hebei Property Market. The transaction price was determined at RMB 479.597 million based on the assessed value of the above shares. On September 6, 2023, the industrial and commercial change registration procedures for the above equity changes were completed. At this point, Tangshan Jingyuan Electronics Co., Ltd. is no longer included in the scope of the company's consolidated financial statements. The company will further focus on the main integrated circuit business. The divestment of the crystal business will effectively raise the company's gross margin level, enhance the company's profitability and management pressure, and maintain competitiveness in core fields.

Investment advice: The company is leading the industry in the field of specialty FPGAs, and a variety of new products have achieved customer breakthroughs. We believe that in the future, the company will maintain high growth over a long period of time. Slightly adjusted the company's profit forecast and predicted that the company's 2023-2025 revenue was 88.36/ 117.52/15.747 billion yuan, up 24.1%/33%/34% year on year. The company's net profit was 29.50/38.89/ 5.89 billion yuan respectively, up 12.1%/31.8% /30.9% year on year, corresponding to EPS 3.47/ 4.58/ 5.99 yuan, PE 21.8/16.5/12.6, maintenance” “Buy” rating.

Risk warning: New product development falls short of expectations; market competition continues to intensify; accounts receivable collection is not timely.