Event: The company released its report for the third quarter of 2023. In the first three quarters of 2023, the company achieved revenue of 6.899 billion yuan, an increase of 10.49% over the previous year; net profit of 188 million yuan, a year-on-year decrease of 124.44%; net profit after deduction of 184 million yuan, a year-on-year decrease of 72.53%. On a quarterly basis, Q3 of 2023 achieved revenue of 2,424 billion yuan, a year-on-year increase of 17.68%, an increase of 0.58% over the previous year; net profit of 148 million yuan, a year-on-year decrease of 184.57%, an increase of 41.91% over the previous year; and non-net profit of 121 million yuan, a year-on-year decrease of 87.17%, a decrease of 56.46% over the previous year.

Q3 Revenue growth bucked the trend, and financial asset impairment dragged down overall performance: In Q3 of 2023, the company increased its promotion efforts to high-threshold markets such as large-scale white power, communications, industry, new energy, and automobiles. Although the prices of some categories of products declined to varying degrees, the company's operating income achieved a year-on-year increase of 17.68%. In Q3 of 2023, the company's gross margin was 21.87%, -5.54pcts year on year, mainly affected by increased market competition and a decrease in the operating rate of some production lines; net interest rate was -5.89%, y-14.05 pcts year on year. The main reason was the decline in stock prices of Yuneng Technology and Anlu Technology among other non-current financial assets held by the company, which caused changes in their fair value to generate net income of -182 million yuan after tax. In terms of expenses, the company's sales, management, R&D, and financial expenses in the first three quarters of 2023 were 1.73%/3.90%/8.47%/2.58%, respectively, with year-on-year changes of +0.12/-0.40/+0.52/+0.41pct, respectively. Among them, the R&D cost rate and absolute value both increased year-on-year, mainly due to the company's increased investment in research and development of new products such as analog circuits, power devices, power modules, MEMS sensors, and silicon carbide MOSFETs, and speeding up the construction progress of automotive-grade and industrial-grade circuit and device chip process platforms.

The product structure continues to be optimized, and the capacity utilization rate has rebounded significantly: since 2023, the company has continued to improve its comprehensive capabilities, focus on high-end customers and high-threshold markets, focus on the current opportunities for the rapid development of the automobile and new energy industries, seize the time window for domestic high-threshold industries and customers to actively import domestic chips, and use its own advantages to expand process technology and product platforms; at the same time, it continues to promote product restructuring, reduce the output of low value-added products, and accelerate the pace of growth of high-value-added products such as IGBT. As of the end of Q2 in 2023, the subsidiary Silanjike has produced 2 per month Production capacity of 10,000 IGBT chips. In the first three quarters of 2023, revenue from high-threshold markets such as large-scale white power, communications, industry, new energy, and automobiles accounted for nearly 70% of the company's sales revenue from finished circuit and device products. In terms of production capacity, the capacity utilization rate of the subsidiary Silan's integrated 5- and 6-inch chip production lines has rebounded to around 90% and remained stable; the subsidiary Silan Jixin's 8-inch chip production line has maintained full production; the capacity utilization rate of the subsidiary Silan Mingxin LED chip production line is also close to full production; in addition, the capacity utilization rate of the company's major shareholder Silan Minglium LED chip production line has also reached more than 90%.

Focus on high-end customers and high-threshold markets, and continue to benefit from the boom in new energy and automobile prosperity: the company adheres to the IDM model, actively expands middle and high-end markets such as automobiles, new energy, industry, communications, and large-scale white power, and continuously enhances the added value of products and product brands. In terms of product development, electric vehicle main motor drive modules based on V-generation IGBT and FRD chips independently developed by the company have been supplied in batches to many domestic and foreign customers such as BYD, Geely, Zero Run, and Huichuan; IGBT devices (single tube) and MOSFET devices (single tube) for automobiles have been shipped in large quantities; IGBT devices (single tube) and inverter control modules for photovoltaics have been shipped in batches; SiC MOS devices have been shipped in batches. In 2023 H1, Chengdu Shilan Co., Ltd. accelerated the construction of the “Automotive Semiconductor Packaging Project (Phase I)” project, and the Chengdu Shidong Phase Plant has already been partially put into production.

By the end of Q2 in 2023, Chengdu Silan Company already has the packaging capacity to produce 170,000 automotive-grade power modules per month; in H2 in 2023, Chengdu Shilan will continue to increase investment in production equipment and further expand the packaging capacity of automotive-grade and industrial-grade power modules. As the share of the company's high-end products continues to increase, benefiting from the rapid development of downstream fields such as new energy and electric vehicles, the company's profitability is expected to improve.

Lower the profit forecast and maintain the “increase in holdings” rating: the company's main business is R&D, production and sales of electronic components. The products mainly include integrated circuits, devices, and light-emitting diodes. As one of the leading IDM companies in China at present, the company has achieved close interaction between characteristic process technology and product development, and the collaborative development of integrated circuits, power devices, power modules, MEMS sensors, optoelectronic devices, and third-generation compound semiconductor chips. Relying on the comprehensive strength of design and process formed by the IDM model, the company can meet the diverse needs of downstream complete machine (vehicle) users and has strong market competitiveness. With the commissioning of fund-raising projects and continuous optimization of superimposed products and customer structures, the company's revenue scale is expected to maintain steady growth, and profitability is expected to improve. Considering that the stock prices of Yuneng Technology and Anlu Technology among the other non-current financial assets held by the company fell, which caused changes in their fair value, which had a large negative impact on the company's profit side, the profit forecast was lowered. The company's net profit for 2023-2025 is expected to be 0.85/3.90/449 million yuan, corresponding to EPS of 0.06/0.28/0.32 yuan, and 393/86/75 times PE.

Risk warning: production capacity expansion falls short of expectations; customer development progress falls short of expectations; product development falls short of expectations; semiconductor prosperity falls short of expectations.