Event: The company released its report for the third quarter of 2023. In the first three quarters of 2023, the company achieved operating income of 1,765 billion yuan, a year-on-year decrease of 6.34%; the profit side achieved net profit of 134 million yuan. In the third quarter alone, the company achieved operating income of 581 million yuan, a decrease of 9.85% over the previous month; net profit of the mother was 156 million yuan.

Chip mass production revenue increased month-on-month, and the IP business declined due to demand and customer R&D cycles: the chip mass production business revenue for the third quarter alone was 326 million yuan, an increase of 37.03% over the previous month, mainly due to the expansion of new customers and the transformation of some existing IP authorized customers and design orders into mass production orders. The company's Q3IP licensing revenue was 94 million yuan, a month-on-month decline of 61.67% due to overall demand and customer R&D cycles; Q3 royalty revenue was 28 million yuan, an increase of 7.17% over the previous month; and the chip design business Q3 achieved revenue of 131 million yuan, a decrease of 1.06% over the previous month.

Continued optimization of customer structure and year-on-year increase in profitability: The company's gross margin in the first three quarters reached 43.42%, an increase of 2.83 percentage points over the previous year, and profitability continued to improve. The company's revenue from customer groups such as system vendors, large Internet companies, and cloud service providers reached 860 million yuan, an increase of 11.21% over the previous year, and the revenue share reached 48.76%, an increase of 7.70 percentage points over the previous year. Based on the continuous increase in the share of high-margin business customers, long-term company profitability will continue to improve.

There are sufficient orders in hand, customers continue to expand, and space has been further opened up: the company's current order amount is 2,058 billion yuan, of which the order amount that can be converted within one year is 1,336 billion yuan, accounting for 64.91%, and the number of in-hand orders is sufficient. At present, the company has successfully entered the supply chain of global core semiconductor manufacturers. At the same time, with the accelerated implementation of AI applications and the reshaping of IP value under the Chiplet trend, the company's long-term development space will be further opened up.

Investment suggestions: The company is expected to achieve operating income of 25.80, 31.51, and 3,954 billion yuan in 2023-2025, corresponding PS of 10.3, 8.5, and 6.7 times, respectively. Maintain the “Overweight” rating.

Risk warning: technology licensing risk; risk of product or service client certification failure; risk of loss of R&D personnel; risk of overseas business.