The 3Q23 performance fell short of our expectations

The company announced 3Q23 results: it achieved revenue of 581 million yuan in a single quarter, -13.51% year-on-year, -9.85%; net profit was 156 million yuan, a year-on-year decrease of 174 million yuan, a year-on-year decrease of 250 million yuan. The company's performance fell short of our expectations, mainly due to fluctuations in the IP business and the year-on-year increase in R&D investment.

Development trends

The company's IP licensing business fluctuated due to downstream demand. In the single quarter of 3Q23, the company's IP licensing fees achieved revenue of 122 million yuan, a decrease of 55.0% over the previous year, a decrease of 43.8% over the previous year. The number of semiconductor IP authorizations in 3Q23 fell 13 to 18 times over the same period, mainly due to factors such as the lengthening decision-making cycle of customer IP licensing projects. Although the company's intellectual property licensing fee business has shown some volatility, looking at previous quarters, the moving average revenue curve of this business has shown an overall trend of growth in recent years. The company's R&D expenses increased 18.2% year-on-year to 699 million yuan in the first three quarters, reflecting the company's emphasis on R&D. We believe that as downstream demand picks up, the company's IP licensing and other businesses are expected to resume growth and continue to be converted into customized business orders.

The increase in the value of the chip customization business is expected to bring scale effects and improved profitability to the company.

3Q23's chip customization business achieved revenue of 457 million yuan, an increase over the same period last month. In the first three quarters of 2023, the company's comprehensive gross margin was 43.42%, an increase of 2.8ppt over the previous year. We believe that the increase in comprehensive gross margin mainly benefited from the increase in value volume and gross margin of the chip customization business. The company has excellent design capabilities in global mainstream semiconductor processes such as CMOS, FinFET, and FD-SOI. At the same time, in the first three quarters of the company's chip design business revenue, process nodes of 28nm and below accounted for 85.40% of revenue, and process nodes of 14nm and below accounted for 55.08% of revenue. By the end of the third quarter, the company's on-hand orders reached 2,058 billion yuan, of which 78% were orders for one-stop chip customization business. We believe that in the future, as the chip customization business benefits from the recovery of demand for consumer electronics, smart cars, etc., and the expansion of the company's design and mass production business, the scale effect of its operations is expected to improve.

Profit forecasting and valuation

Considering that the chip design and mass production business are affected by short-term demand adjustments and the company's R&D expenses, we lowered the 2023 income/net profit forecast by 29%/125% to 25.7/-0.5 billion yuan, respectively, and introduced a revenue and net profit forecast for 2024 of 3.26/0.7 billion yuan. Investors are advised to pay attention to improvements in downstream demand. Considering that the company is still in the early stages of growth and that it will still take time to reach a profit scale, we switched to a valuation based on 26-year net profit. We forecast that the company's net profit is expected to reach 990 million yuan in 2026, giving a P/E of 35x in '26. We maintained that the company outperformed the industry rating and target price of 58.00 yuan, with 3.1% room for growth.

risks

Downstream demand falls short of expectations; new product development falls short of expectations; and product certification falls short of expectations.