Matters:
On October 30, 2023, the company released its report for the third quarter of 2023:
1) 2023Q1-Q3: The company achieved operating income of 2,738 billion yuan, +1.25% year-on-year; gross profit ratio of 64.58%, year-on-year -0.45pct; net profit attributed/withheld from mother to mother of 650/604 million yuan, -24.33%/-27.75% year-on-year;? 2) 2023Q3: The company achieved operating income of 942 million yuan, -6.00%/-4.57%; gross profit ratio of 59.76%, year-over/month-on-month -5.32pct/-7.62pct; net profit of 210 million yuan, y-8.88%/-23.04%; net profit of 188 million yuan after deducting net profit of 188 million yuan, -40.41% /-19.75% year-on-month.
Commentary:
Performance is under pressure in the short term. Highly reliable business volume+demand recovery is expected to drive the company's performance back to the growth path.
Affected by weak downstream demand, the company's short-term performance has fluctuated. 2023Q3 achieved revenue of 942 million yuan, -6.00% /-4.57% yoy, of which security and identification chip revenue was 227 million yuan, non-volatile memory revenue was 268 million yuan, smart meter chip revenue was 77 million yuan, and FPGA and other products revenue was 325 million yuan. In terms of profitability, product restructuring has led to a decline in the company's gross margin. The company's performance is expected to return to a growth trajectory as the volume of highly reliable new products is compounded by the recovery of downstream demand such as MCUs.
The company's high reliability business technology leadership is remarkable, and product differentiation maintains strong demand. The company took the lead in successfully developing billion-level FPGAs and PSoC chips in China. About 35% to 40% of the 2023H1 FPGA revenue is contributed by PSoC products, and the volume of high-end products has enabled the company to maintain a leading competitive advantage. The 2023Q1-3 FPGA and other chips achieved revenue growth of more than 50% year-on-year, far higher than domestic peers. The company is promoting a new generation of 1 billion gate-level FPGA products based on the advanced 1xnm FinFET process. Under its technological advantages, the company continues to benefit from the trend of localization, and the gradual launch of new products in the future will provide an impetus for the company to continue to grow.
The company's MCU and other businesses are gradually breaking out of the trough, and product upgrades are expected to return to the growth path. Since the second half of 2022, the company's MCU and non-volatile memory businesses have faced great pressure, and the short-term pressure on the civilian goods business has had a significant impact on the company's short-term performance. As the industry's inventory removal was gradually completed, the company's MCU and other products gradually broke out of the industry trough, and the 2023Q3 MCU business revenue increased 16.67% month-on-month. The three product lines of security and identification chips, non-volatile memory, and MCU have all entered the automotive electronics field. As the product structure and customer structure continue to be optimized and upgraded, future performance growth is worth looking forward to.
Investment advice: As an established IC design company, the company continues to benefit from domestic alternative opportunities, while FPGA has entered a harvest period. Considering the short-term pressure on the company's demand for civilian goods, we lowered the company's net profit forecast for 2023-2025 from 1,078/14.66/1,888 million yuan to 8.13/12.49/1,622 billion yuan, corresponding to EPS of 1.00/1.53/1.99 yuan. Referring to industry-comparable company valuations and the growth rate of our own performance, we gave the company 42 times PE in 2024, corresponding to the target price of 64.2 yuan/share, maintaining a “push” rating; we gave the company's AH shares a discount rate of 40%, that is, 16.8 times PE for Hong Kong stocks in 2024, corresponding to the target price of HK$28.0 per share, maintaining a “push” rating.
Risk warning: downstream demand falls short of expectations; new product launches fall short of expectations; capacity support falls short of expectations.