Incidents: On October 28, the company released its report for the third quarter of 2023. Q1-Q3 in '23, it achieved revenue of 593 million yuan, a year-on-year decrease of 25.65%; net profit of the net income of the mother -- 138 million yuan, a year-on-year decrease of 323.71%; and realized net profit deducted from non-return to the mother -- 162 million yuan, a year-on-year decrease of 604.26%. The third quarter achieved revenue of 189 million yuan, a year-on-year decrease of 32.94%; realized net profit of 57 million yuan, a year-on-year decrease of 340.79%; and realized net profit after deducting non-treasury net profit of -62 million yuan, a year-on-year decrease of 650.29%.

Affected by the industry's downturn cycle, the company's performance in the third quarter was under pressure. The integrated circuit industry has been developing well for a long time, but the cyclical nature of the industry is obvious. According to forecast data released by the World Semiconductor Trade Statistics Association in June 2023, the global integrated circuit market will decline 13% year on year to reach US$412.832 billion in 2023; then there will be a slow recovery, and is expected to achieve a growth rate of 13.9% in 2024. Affected by sluggish demand in markets such as communications and industry, etc., shipments of the company's mature products have slowed, and both revenue and profit have declined.

The FPGA market space is vast, and the potential for domestic substitution is huge. FPGA chip is a general logic chip, widely used in industrial control, network communication, consumer electronics, data centers and other fields. According to the company's prospectus, the size of the FPGA market is expected to continue to increase as the global deployment of next-generation communication equipment and demand in emerging market fields such as artificial intelligence and autonomous driving technology continues to grow. According to Frost & Sullivan statistics, the global FPGA market is expected to grow from US$6.86 billion in 2021 to US$12.58 billion in 2025, with an average compound annual growth rate of about 16.4%. With the advancement of digital transformation in recent years, demand for data centers, artificial intelligence, and machine learning in various industries has grown rapidly, and demand for FPGAs is expected to continue to rise. The recognition of domestic FPGAs continues to rise, and the company is expected to seize the lead in the domestic substitution wave and gradually increase its market share.

Investment advice: We believe that the company's short-term performance is under pressure, but as a leading domestic FPGA chip supplier, it is expected that through continuous high-intensity R&D investment and a perfect product ecosystem, it will build core technology and product ecological barriers to seize an opportunity in the domestic substitution wave, and the company's medium- to long-term performance is expected to rise to the next level. It is estimated that the company's revenue from 2023 to 2025 will be 854 million yuan, 1,213 million yuan, and 1,589 million yuan, respectively, and net profit of -104 million yuan, 19 million yuan, and 128 million yuan, respectively. Using the PS valuation method, considering that the company is a scarce target for FPGAs, referring to the closing of the market on November 1, select the average valuation values of large digital chip companies such as Haiguang Information, Jing Jiawei, Longxin Zhongke, and Aojie Technology, etc., and give 23.34 times PS in 2023, with a target price of 49.7 yuan, maintaining the “buy-A” investment rating.

Risk warning: Downstream demand falls short of expected risk, industry competition increases risk; technology iteration falls short of expected risk; product development failure or industrialization falls short of expected risk.