Event: On October 27, the company released its report for the third quarter of 2023. In the first three quarters of 2023, the company achieved operating income (5.642 billion yuan, +14.31%), net profit from the mother (2,031 billion yuan, -0.48%), non-net profit deducted from the mother (1,922 million yuan, -1.69%); 23Q3 achieved operating income (1,908 million yuan, -6.08%), net profit from the mother (639 million yuan, -24.21%), and non-net profit (600 million yuan, -25.19%).

Revenue growth slowed slightly in the first three quarters, and changes in delivery structure put pressure on Q3 gross margin.

The company achieved revenue of 5.642 billion yuan (+14.31%) in the first three quarters. The growth rate was slightly slower than before, or it may be due to a short-term slowdown in downstream demand in special sectors due to mid-term adjustments.

On a quarterly basis, the company's net profit for 22Q3-23Q3 was 8.43/5.91/5.84/808/639 million yuan, respectively, with a year-on-year increase of 44.87%/19.08%/10.03%/21.15%/-24.21%, respectively. Combined with 23Q3's revenue (1,908 billion yuan, -6.08%), the decline in net profit was mainly due to a decrease in gross margin of 3.68 pct to 62.00% during the reporting period, combined with overall performance from year to date and the disclosure data of each business in the semi-annual report or This is mainly due to the continued increase in the share of the smart security chip business with relatively low gross margin, while the price side of specialty products continues to be under pressure. The cost rate increased by 3.79pct to 27.61% during the 23Q3 period, or mainly due to the weakening of the dilution effect on fixed expenses due to a decline in revenue scale. Among them, the sales expense ratio increased by 0.99pct to 4.15% year over year, the management expenses rate increased 0.99pct to 3.60% year over year, and the R&D expenses rate increased 1.07pct to 19.46% year over year. Furthermore, due to the increase in the company's bad debt preparation for accrued accounts receivable, and credit impairment losses in 23Q3 increased by 18.3816 million yuan to 209.614 million yuan over the same period last year due to the continued expansion of the size of accounts receivable. In the end, the 23Q3 net interest rate fell 7.66 pct to 33.47% under pressure. Considering that the company's downstream demand for special integrated circuits is expected to continue to improve along with the implementation of subsequent mid-term adjustments, it is expected that with the continuous increase in shipments of high-value-added products, the company's profit may or may be expected to return to the ideal range.

The R&D expense ratio continues to rise to record highs, and net interest rates are being squeezed in the short term. The gross margin for the first three quarters of 2023 fell by 1.91pct to 63.82%, combined with semi-annual report data and industry performance estimates, or mainly due to the increase in the share of the smart security chip business with relatively low added value under pressure on the gross margin of special integrated circuit products. On the other hand, net profit was realized in the first three quarters of 2023 (2,031 billion yuan, -0.48%), of which net interest rate fell by 5.31 pct, mainly due to an increase in the cost rate of 3.43 pct to 25.94% during the reporting period. Among them, the management expense ratio increased by 0.41 pct to 3.70% year on year, and the sales expenses rate increased by 0.21 pct to 4.09% year on year, or mainly due to a slowdown in the growth rate of the company's short-term revenue volume and weakening of the dilution cost effect. The company is actively expanding its product lineage and R&D labor costs have increased, and the R&D cost rate has increased by 3.18 pct to 18.51%, a record high for the same period. As an IC design enterprise, the company's continued increase in R&D investment is expected to further strengthen its own technical barriers and industry competitiveness, so that the company can fully benefit from the gradual release of demand in various fields in the future.

Q3 Due to changes in product structure under continuous delivery, cash flow performance is expected to improve in the future. By the end of the third quarter, accounts receivable had increased 56.37% from the beginning of the year to 4.857 billion yuan, a slight increase of 11.14% from the end of the second quarter, reflecting the company's overall smooth delivery of Q3. At the same time, combined with the reduction in Q3 gross margin, we believe that the company's Q3 product delivery structure may have changed, and the share of specialty products with high added value has decreased, while the share of delivery of non-special products such as smart security chips has increased. Accounts payable increased 39.09% from the beginning of the year to $1,249 million and 8.23% from the end of the second quarter, mainly due to the continued increase in inventory in the company's integrated circuit business. The company's cash flow from operating activities in the first three quarters increased slightly by 3.31% year on year to $1,181 million, mainly due to the growth of integrated circuit business in the second quarter and a sharp increase in sales revenue, contributing 968 million yuan. Net cash flow from single Q3 operating activities was 32 million yuan, a year-on-year decrease of 95.88%. Mainly, the company's special integrated circuit business repayments were concentrated at the end of the year, and cash flow performance will improve after subsequent repayments are completed.

Investment suggestions: The company is a leading enterprise in the field of special ICs in China, and continues to explore its capability boundaries through the “expansion of category+downstream” approach. Currently, it has a high market share in the aerospace sector, and is expected to continue to grow rapidly in the context of China's information technology construction and accelerated domestic production substitution; at the same time, it is expected to continue to grow rapidly; at the same time, it is accompanied by continuous breakthroughs in the field of high-speed RF analog-to-digital converter chips, and new high-performance video processor series chips, and new high-performance video processor series chips, and sufficient long-term development momentum. The company's net profit for 2023-2025 is estimated to be 2.7 billion, 34 and 4.1 billion yuan respectively, which is 25 times PE for 24 years, corresponding to a target price of 100 yuan for 6 months.

Risk warning: orders for special integrated circuits fell short of expectations; orders for smart security chips fell short of expectations