3Q23: FPGA inventory removal has not yet been completed, and revenue has declined month-on-month
The company's 3Q23 achieved revenue of 188 million yuan (yoy: -13.06%, qoq: -32.94%), net loss of 57.49 million yuan (yoy: -340.79%, qoq: -96.06%), slightly lower than our previous expectations (3Q23: revenue of 200 million yuan, net profit of the mother - 46 million yuan), net loss of 62.15 million yuan (yoy: -43.90%, qoq: -650.29%). The year-on-month decline in 3Q23's revenue was mainly due to: 1) terminal demand in major markets such as communications and industrial control continued to be sluggish, and the company's mature product shipments declined; 2) the Phoenix series of new product customers and new projects were successfully introduced, but overall revenue contribution was limited. As the revenue share of Phoenix series products continued to rise, 3Q23's gross margin steadily rebounded to 35.86%. Considering that the communication/industrial control market is still digesting inventory, we have revised the company's 23-25 revenue forecast to 8.59/12.79/1,814 billion yuan (previous value: 10.05/15.08/2.126 billion yuan). As a scarce FPGA supplier in China, the release of new products such as the Phoenix high-end series is expected to open up a wider market space, giving 27x 23PS (comparable company 24x 23PS), with a target price of 57.8 yuan, “buy” rating.
3Q23 review: Communications/industrial control market demand is still low, and the company's gross margin is rising steadily
Entering the third quarter, there are no obvious signs of a reversal in demand in major markets such as communications and industrial control. End customers are still in the inventory removal stage. The company's mature product shipments declined significantly, and 3Q23 revenue fell 13.06%/32.94% month-on-month. Benefiting from the completion of customer introduction and the beginning of sales of new Phoenix series products, the revenue share of Phoenix series products continued to increase, and the company's 3Q gross margin steadily rebounded to 35.86% month-on-month (yoy: -6.13pct, qoq: +0.08pct). The company is guided by market demand and adheres to high-intensity R&D investment. In 3Q23, R&D expenses reached 104 million yuan (YOY: +18.85%, QoQ: +2.16%).
In terms of inventory, the company's inventory at the end of the third quarter was 803 million yuan, an increase of 21 million yuan over the end of the previous quarter. The increase has narrowed (1Q23/2Q23: +1.27/+94 million yuan), but it is still at a high level.
4Q23/24 outlook: The product matrix is gradually being improved, and domestic substitution is expected to accelerate
Intel said at the 3Q23 performance conference that the FPGA market is entering the inventory removal stage after experiencing strong demand growth and supply shortages, and it is expected that downstream customers will still make inventory adjustments in the fourth quarter. Against the backdrop of weak overall market demand, we believe that the company's short-term operations are also under some pressure, but it is expected that next year will see a recovery: 1) the introduction of new customers with large PHOENIX1 logical capacity and small to medium logical capacity has been completed one after another, and 2H23 has begun batch shipping, which will be further expanded next year; 2) the company is actively carrying out PHOENIX2 testing and certification work, and mass production is expected to be achieved within the year. The company's Phoenix series product matrix has been gradually improved, and development of high-capacity FPSoC products is progressing smoothly. Increased product coverage will help the company accelerate domestic replacement after this round of inventory removal cycle ends.
Investment advice: Target price 57.8 yuan, maintain “buy” rating
The company's current P/S (18x) is 41% lower than the historical average, and the valuation may more fully reflect pessimistic expectations about the FPGA market. Considering the domestic replacement of the FPGA market is still in the early stages, the company's FPSoC and the release of new products in the Phoenix high-end series are expected to open up more market space, and we still give a “buy” rating.
Risk warning: Market competition has intensified, R&D and new product promotion have fallen short of expectations, and customer concentration is high.