Incidents: The first three quarters of 2023 achieved revenue of 394 million yuan, a year-on-year decrease of 18.49%; net profit loss of 207 million yuan, profit for the same period last year of 73 million yuan; net profit loss of 303 million yuan after deducting non-net profit, a loss of 122 million yuan for the same period last year.

Q3 Performance continues to be under pressure, and demand for innovation is yet to pick up. In Q3, the company achieved revenue of 86 million yuan in a single quarter, a year-on-year decline of 36.53%. Revenue pressure during the reporting period was mainly due to a decline in policy market demand and the temporary suspension of procurement in specific fields. Q3 In a single quarter, the company lost 103 million yuan in net profit and 16 million yuan in the same period last year; after deducting non-net profit loss of 128 million yuan, loss of 96 million yuan for the same period last year. The company's gross margin for the first three quarters was 35.79%, with a year-on-year change of -13.58pcts, mainly due to revenue decline and fixed cost sharing; Q3 single-quarter gross profit margin was 35.33%, a year-on-year change of +0.24pcts.

R&D investment has increased markedly, focusing on chip localization. The sales, management, and R&D expenses for the first three quarters were 19.31%, 25.15%, and 78.44%, respectively, with year-on-year changes of +5.67 pcts, +9.94 pcts, and +34.67 pcts; of these, R&D investment was 392 million yuan, an increase of 48.79% over the previous year, mainly for chip product development, solutions and ecosystem construction. Net cash flow from operating activities in the first three quarters was -282 million yuan, compared with -448 million yuan for the same period last year, mainly due to a decrease in cash from procurement payments during the reporting period.

Adhere to the path of self-research and build an autonomous CPU ecosystem. The company adheres to the independent command system LA and builds an open information technology system independent of the Wintel system and the AA system. Mainly using the Fabless model, we developed our own three series of processor chips and supporting chips such as Longxin-1, Longxin2, and Longxin3. In order to support chip sales and applications, the company has developed a basic version of the operating system and important basic software such as browsers and Java virtual machines to build autonomous ecological barriers.

Profit forecast and investment recommendations: Net profit from 2023-2025 is expected to be 0.77/134/186 million yuan, maintaining the “increase in holdings” rating.

Risk warning: ICT demand growth falls short of expectations; Longxin's ecological expansion falls short of expectations; and technology research and development falls short of anticipated risks.