Events: The company achieved revenue of 2,738 billion yuan in the first three quarters, up 1.25% year on year; 23Q3 achieved revenue of 942 million yuan, down 6% year on year; product demand was divided, and demand for high-reliability products grew steadily. Among them, revenue from Q3 FPGA chips and other business/non-volatile memory businesses increased 38%/17% year on year respectively, which became the driving force for performance growth, while consumer chip products faced insufficient demand, inventory still to be digested, and price pressure, etc., led to a year-on-year decline in security and identification chip/smart meter chip business revenue, respectively 18%/59% On the profit side, the gross profit margin for the first three quarters was 65.0%, down 0.45pct year on year, mainly due to 23Q3 gross margin falling 5.3 pct to 59.8% year on year. Prices of industrial grade non-volatile memory, MCU, and smart meter products were under pressure, leading to a reduction in gross margin; net profit for the first three quarters was 650 million yuan, down 24% year on year; of these, 23Q3 net profit was 201 million yuan, down 39% year on year, corresponding to net profit margin falling 21% year on year. Increased input, The company's R&D expenses in the first three quarters increased 35% year over year.
Highly reliable products, FPGA and non-volatile memory, maintained steady growth: 1) FPGA chips and other products, 3Q23 achieved revenue of 325 million yuan, an increase of 38% over the previous year. The company has tens of million gate level and 100 million gate level FPGA chips and batch applications. PSoC has also successfully mass-produced and received multiple customer orders, released a reconfigurable chip FPAI that integrates FPGA and AI for AI applications; and supports key technologies such as programmable devices and EDA, forming a technology cluster advantage in the FPGA field. Under the demand for FPGA localization and replacement, we believe that the FPGA chip and other product business will maintain a high growth rate in 23Q4. 2) Non-volatile memory. 3Q23 achieved revenue of 268 million yuan, an increase of 17% over the previous year. Thanks to the company's continued enrichment of product layout, improvement of product performance, and expansion of new application fields represented by vehicle regulations, we are optimistic about the further expansion of 23Q4's memory business. The company continues to make efforts at the R&D level, and plans to issue convertible bonds of no more than 2 billion yuan to develop next-generation FPGAs and PFSoC chips based on the advanced 1xnmFinFET process, new process platform memory development and industrialization projects; at the level of commercial applications, the company continues to expand industrial-grade and automotive fields and actively introduce new customers.
Demand in the consumer electronics market is weak, and 23H2's civilian goods business is under pressure: the 3Q23 security and identification chip business achieved revenue of 227 million yuan, a year-on-year decrease of 18%; the smart meter chip business achieved revenue of 77 million yuan, a year-on-year decrease of 59%. The current demand for the company's consumer goods category is insufficient and the previous inventory has not been digested. Market competition is fierce, leading to increased price pressure. In '23, private goods revenue is expected to decline year-on-year, making it impossible to maintain the high growth rate in '22. Currently, there is no sign of recovery in downstream consumer electronics markets such as home appliances, computer peripherals, and networking equipment. The performance of the company's security and identification chips and smart meter chips business may be under pressure. The company is actively expanding into applications such as automobiles and the Internet of Things to make up for it.
Profit forecast, valuation and rating: Considering the promotion of FPGA chip localization and substitution, the memory business is expected to continue to expand, but demand for civilian products is sluggish and prices are under pressure, dragging down revenue growth and profitability. The company's net profit forecast for 23-25 was lowered to 8.45/11.63/1,447 billion yuan (down 21%/16%/15% from the previous forecast, respectively), and the corresponding year-on-year growth rate was -22%/38%/24%, respectively. The current closing price is HK$13.84, corresponding to the 23/24 net profit forecast of 13x/9xp/E. The valuation is in a low position, but since the company's consumer goods demand has yet to show signs of recovery, Shanghai Fudan (H) has been lowered to the “increase in holdings” rating.
Risk warning: Downstream demand for semiconductors falls short of expectations; risk of price reduction for specialty chips; new product development and technology iteration falling short of expectations; risk of increased market competition.