Event: The company released its report for the third quarter of 2023. 2023Q3 achieved operating income of 2,872 billion yuan, up 66.62% year on year, up 29.03% month on month; realized net profit of -287 million yuan, a decrease of 9.05% month-on-month in loss amounts. Excluding 77 million yuan, the month-on-month narrowing of equity incentive expenses was even more obvious; it achieved net profit after deducting $293 million, and losses narrowed 9.05% month-on-month.

Comment: 23Q3 revenue increased sharply over the same period, and net profit and loss narrowed sharply. Excluding additional shares, the reduction in payment fees is even more obvious. In terms of gross margin, the company's Q3 gross profit margin is 4.94%, QoQ+4.41pct, a clear improvement over the previous month. The Q4 price increase guidelines for the storage sector are clear, storage cycle recovery+eSSD and other core product performance increases. It is anticipated that the company's short- and medium- to long-term performance will continue to rise, and the effects of industry-side original factory production cuts have surfaced, and storage spot NAND and DRAM markets are expected to rise one after another. It is expected that NAND and DRAM will continue to rise in 23Q4 and 24Q1, and Jiang Bolong's share of NAND products will continue to rise. On the supply side, as of September 30, 2023, original manufacturers such as Micron and Samsung have announced production cuts. According to the fiscal quarter data for June to August 2023 released by Micron Technology, the number of inventory turnover days fell to 170 days compared to 214 days in 22Q4. There are signs that inventory control for original storage manufacturers has begun to show results, and a trend of rising wafer prices has taken shape. On the demand side, 1) According to CFM flash memory market forecasts, as channel inventories return to normal levels, and the increase in switching demand next year, the overall shipment volume is expected to increase by about 5%. Also, due to falling storage product costs and the emergence of AI PCs, capacity growth is expected to reach double-digit percentages in 2024. 2) According to the CFM flash memory market forecast, the smartphone market is accompanied by the arrival of some switching cycles, and overall device shipments are expected to increase by about 5% next year. Furthermore, more widespread AI applications are expected to drive the penetration of high storage density products. 3) According to the CFM flash memory market forecast, the server market is expected to gradually recover in 2024 as investment from cloud service providers increases and demand for improvements increases. Among them, due to intense competition in artificial intelligence, AI server investment demand continues, and general server investment will also be restored. In terms of prices, according to CFM data, the supply side has been actively promoting price increases for NAND products for several weeks. Overall, the storage spot market has been rising one after another.

Trendforce expects the contract price of NAND Flash for the fourth quarter to rise across the board, with an increase of about 8-13%. Looking at DRAM, it is estimated that the fourth quarter contract price will increase by about 3-8% quarterly. Looking ahead to the first quarter of 2024, it is estimated that the overall memory growth will continue, and it is estimated that mobile DRAM and NAND Flash (eMMC, UFS) contract prices will continue to rise in the first quarter of next year. NAND is expected to account for about 90% of Jiang Bolong's product line, and is optimistic about the company's continued growth momentum as the Q4 and 24Q1 markets rise.

The world's leading integrated semiconductor storage leader, Lexar+Foresee's brand value continues to be highlighted. Jiang Bolong is mainly engaged in the R&D, design and sales of Flash and DRAM memory, providing consumer grade, industrial grade, vehicle grade memory and industry storage software and hardware application solutions. The company independently cultivates the brand FORESEE for the industrial market TOB+ and acquires Lexar to explore the high-end consumer ToC storage market. The brand revenue structure is continuously optimized, focusing on industry applications and high-end consumer markets. In addition to its own brand FORESEE, the company included Lexar in 2017. Lexar focuses on high-end consumption, which is an important process for the company to expand overseas markets. From January to September 2021, the company's mobile storage products ranked in the top 2 in the global market share of memory cards, and in 2020, the eMMC market share of embedded storage products ranked seventh in the world. The company relies on the Lexar brand to focus on the high-end consumer market. From 2019 to 2021, Lexar ranked third in the world in terms of memory cards and flash drives. The global sales revenue of the 2023H1 Lexar (Lexar) brand business reached 956 million yuan. Against the backdrop of severe pressure on the global storage industry, the Lexar (Lexar) brand achieved 26.08% year-on-year growth. The influence of the Lexar (Lexar) brand in the global storage to C market was further highlighted. The retail business covered 52 countries. The sales revenue of the Lexar (Lexar) brand in the Middle East, Oceania, and South Asia (such as India) increased markedly. The corresponding market increase reached 42%-82% year-on-year, making up Lexar ( (Lexar) A new force in the growth of global sales revenue for the brand.

AIGC's demand for AI servers has increased exponentially, and China's enterprise-grade solid-state drive market share needs to be increased urgently. Xinchuang will bring about the trend of localizing server memory. The mass production and shipment of the company's eSSD and RDIMM products is expected to lead to rapid growth in subsequent performance. The number of parameters of each generation of GPT models is growing rapidly. Unlike computing power, which focuses on “computation,” data storage is a reflection of the comprehensive ability to process data production factors. When storage efficiency is low, it is difficult for computing power to play a role. Currently, there is a clear imbalance between China's savings and investment ratio compared to the US and Western Europe, and storage may become a shortcoming in economic development, especially in the field of high computing power. As a product of big data+big model+big computing power, ChatGPT may drive the exponential rise of AI servers. AI servers can have eight times the DRAM capacity and three times the NAND capacity of regular servers. In 2021, original international storage manufacturers such as Intel, Samsung, and Micron accounted for a total share of more than 70% of the Chinese enterprise-grade SSD market, dominating the market. As the country continues to pay more attention to autonomous and controllable data security, memory, as a direct carrier for data storage, plays a key role in the implementation and implementation of data security controllable strategies. The implementation of relevant national policies represented by the “Guiding Opinions of 16 Departments Including the Ministry of Industry and Information Technology on Promoting the Development of the Data Security Industry” means that domestic enterprise-grade SSD manufacturers will usher in a wider development space. At the end of '22, Jiang Bolong officially released two enterprise-grade SSDs, namely the Longsys ORCA 4836 series NVMe SSD and the LongsySuncia 3836 series SATA 3.2 SSD, which support PCIe 4.0, respectively, target enterprise-grade read/write intensive and hybrid application scenarios and requirements from system boot disks to high-capacity data disks, taking the first step in the high-end storage field of enterprise-grade SSDs. In March 2023, Jiang Bolong released the Longsys AQUILA series 32GB 2R×4 specification DDR4 RDIMM enterprise-grade dedicated memory stick, marking the next level of the company's DIMM storage business. In the first half of 2023, the company has introduced the verification company's eSSD and RDIMM products to some potential customers, and is expected to gradually achieve volume growth. In particular, it has broad market prospects in the field of enterprise storage for data centers, and the company will also form a competitive advantage in product support. As far as the company's enterprise storage product portfolio is concerned, it is mainly eSSD products in the company's SSD product line and RDIMM products in the memory card product line. Both types of products are high-end storage products mainly used in complex application scenarios such as servers. As of August 2023, the company's eSSD and RDIMM products have passed the certification of important customers including Lenovo, JD Cloud, and BiliBili, and have received official orders from some customers to achieve mass production and shipment. The mass production and shipment of the company's eSSD and RDIMM products represents that the company has made new progress in the key market of enterprise storage, which will bring new growth to the company's performance. With the promotion of national policies, while the operator-dominated public cloud market has ushered in development, customers will also consider adopting more domestic eSSDs based on localization and security considerations. The company's enterprise-grade storage products received bulk orders from some customers in 2023, which will lay the foundation for rapid growth in 2024.

Improve the industrial chain layout and successively acquire SMART Brazil and Licheng Suzhou. Among them, Licheng Suzhou has officially completed delivery, enhanced the expansion and maintenance capabilities of major customers, and further expanded overseas markets. On October 1, 2023, the company acquired 70% of the equity transaction of Licheng Technology (Suzhou) Co., Ltd., which has been officially completed, and has been included in the scope of Jiang Bolong's consolidated statement since October 1, 2023. After the transaction is completed, Yuancheng Suzhou will officially operate independently and continue to undertake closed testing services for existing customer groups. In addition, Yuancheng Suzhou will further increase its investment in R&D and packaging testing processes, actively introduce high-end packaging testing equipment and outstanding talents in the industry, and continue to improve packaging testing capabilities to build a high-end packaging testing base to better provide high-quality services to customers in various fields such as artificial intelligence, high-performance computing, smart cars, smart phones, and smart wearables. As Jiang Bolong's concrete measure to strengthen the manufacturing side layout, the company is expected to further improve memory chip packaging testing capabilities and capacity utilization, improve the industrial chain layout, strengthen business partnerships with original storage wafers, and form synergies in various areas such as improving product quality, responding quickly to customer needs, flexibly customizing product specifications, and providing stable production capacity, enhancing the company's market influence and core competitiveness, and ultimately enhancing the company's long-term profitability and achieving the strategic layout of the company's semiconductor storage brand. On June 13, 2023, the company announced the acquisition of 81% of SMART Brazil's shares. This move is expected to drive the triple resonance of technology alliance+market development+performance enhancement. SMART Brazil has been deeply involved in the storage manufacturing field for 20 years. After the acquisition, along with Jiang Bolong's strong firmware capabilities, it is expected to further increase its market share. Achieve 1) a combination of strong sealing and testing capabilities and firmware capabilities 2) open up broad space in the Brazilian market 3) optimize the company's overall profit level.

Investment suggestions: Since the macroeconomic environment has not improved significantly in the short term, the downstream market of the industry may be under pressure in the short term. In particular, the decline in the consumer electronics market is particularly obvious. We have lowered our profit forecast. The company's net profit is expected to be lowered from 0.3 billion yuan to -900 million yuan in 2023. The company is expected to achieve net profit of 476/656 million yuan in 2024/2025, maintaining the company's “buy” rating.

Risk warning: concentrated sales regions, rising labor costs, loss of R&D technicians, cycle recovery, innovation and ChatGPT implementation falling short of expectations