Event: On October 25, the company released its report for the third quarter of 2023. In the first three quarters of 2023, the company achieved revenue of 1,034 billion yuan, a year-on-year decrease of 19.28%; realized net profit of 37 million yuan, a year-on-year decrease of -194.15%.

Results for the third quarter continued to be under pressure, and gross margin improved month-on-month. Affected by weak market demand for storage products and falling prices, Q3 achieved revenue of 328 million yuan in 2023, a year-on-year decrease of 32.51%, a year-on-month decrease of 9.39%; net profit of 0.17 million yuan, a year-on-year decrease of 200.26%, a year-on-year decrease of 37.04%; from the profit side, the company's gross margine/net margin for the first three quarters of 2023 was 6.02%/-3.69%, down 2.80/6.74pct, respectively; The gross margin of the Q3 company in 2023 was 4.15%, up from the previous month At 0.41pct, the net profit margin was -5.32%, which narrowed by 2.38pct from month to month. Profitability improved in a single quarter. Looking at the cost side, the cost rate for the 2023Q3 company for the period was 10.92%, +6pct over the same period. Among them, the sales/management/development/development/finance expense ratio was 4.14%/4.63%/2.08%/0.08%, respectively, with year-on-year changes of +0.90/+2.92/+0.80/+1.39pct, respectively, and the overall cost rate increased significantly.

Actively promote the iterative upgrading of products and accelerate domestic substitution. The company actively accelerates the R&D process and promotes the iterative upgrading of storage products for new processes and solutions. In terms of product development, 1) solid-state drive products, hardware adapts to consumer and industry customer product needs through continuous optimization of SATA and PCIe protocols, while using the advantages of software and hardware; 2) memory products. To meet the high-performance storage requirements of host products in consumer and industry markets, the company accelerates the development and layout of products of different types and frequencies (especially ultra-high frequency); 3) memory card products, the company continues to develop higher performance data storage solutions in line with market conditions, actively iterates on existing product update plans, while actively iterating on existing product update plans, while at the same time making use of the advantages of software and hardware; 2) memory products. Discontinued processing for rational use of resources. We believe that with the rapid development of emerging fields such as AI and the Internet of Things and the Internet of Vehicles, the localized independent brand “Lang” series gradually established by the company, it is expected that product iteration will continue to accelerate, and localized substitution will continue to accelerate.

Seize opportunities in emerging industries and steadily advance the upstream and downstream layout of the industrial chain. As the development of emerging industries accelerates, the market demand for high-performance storage products is increasing, and the required equipment is developing in the direction of new interface protocols, new product forms, high speed, and large capacity. The company grasps the development opportunities of AI intelligence, the Internet of Things and new energy vehicles, and continues to develop and iterate on higher performance data storage solutions and products. 1) In the field of the Internet of Things and new energy vehicles, actively developing new business areas to create the company's second curve. Currently, it has invested indirectly in GAC Aian through the Xinyi Ruian Fund; 2) Upstream packaging testing field and a joint venture with Chuangxinyuan to build a testing plant in Shaoguan Langzheng; in addition, the company has invested in the construction of a memory chip packaging and testing plant, and has invested in the development of 3 high-speed SMT production lines to flexibly adjust procurement and production strategies in response to changes in policies, demand and market conditions to ensure production, operation and operation efficiency. 3) In the downstream AI intelligence computing field, Lanco Intelligence has set up a joint venture with Beijing Computing to engage in AI intelligent computing equipment and other products and solutions. It has released products such as AI servers, high-density smart computing stations and smart small stations. The relevant project solutions have covered many large central enterprise customers; signed a strategic cooperation agreement with Shanxi Computing to give full play to their respective market advantages in the storage and AI intelligence industry, and participate deeply in the construction of a national intelligence center in Shaoguan. We believe that as the company continues to promote the integration up and down of the industrial chain and the development of emerging businesses, products are expected to develop from consumer-grade storage to enterprise-grade storage and automotive-grade storage; at the same time, it will continue to promote the implementation of new products and technologies from “vitality” to “computing power” to accelerate the development of the field of intelligent computing.

Profit forecast and investment rating: We predict that the company's net profit from 2023-2025 will be 0.69/0.86/107 million yuan, and the current stock price corresponding to PE is 92/73/58 times, respectively. Given that the company's storage products are expected to benefit from the construction of the Shaoguan data center industry cluster, future performance is expected to grow rapidly and maintain the “buy” rating.

Risk warning: risk of innovation or product updates falling short of expectations, risk of raw material price fluctuation, risk of market competition, risk of exchange rate fluctuation, risk of Shaoguan data industry cluster business development falling short of expectations, memory chip supply risk.