Affected by some high-quality markets and policy market adjustments, the company's revenue is under pressure. In the first three quarters of 2023, the company achieved cumulative revenue of 394 million yuan, a year-on-year decrease of 18.49%; in the third quarter, the company achieved revenue of 86 million yuan, a year-on-year decrease of 36.76%. By business, due to the temporary suspension of procurement of industrial control chips in industries where some high-quality products are located, due to internal management reasons in the industry, industrial control revenue in industrial control chips and solutions has declined; in the information technology business, the introduction of X86 and ARM technology in the e-government market has led to increased product competition, and the company's shipments have declined, and revenue has declined year-on-year. It is expected that with the completion of internal adjustments in the industry where some high-quality products are located and the government market gradually picks up, the company's performance is expected to recover.

Affected by the low revenue base, the company's profit margin declined. The 3Q23 company's gross margin was 35.33%, up 0.24pp from the same period last year, up 0.12pp from the second quarter, net profit margin was -119.32%, down 107.78 pp from the same period last year, and down 102.67 pp from the second quarter. The 3Q23 company's sales/management R&D/finance expense ratio was 30.23%/38.37%/130.23%/1.16%, respectively, compared with the same period last year, +2.59%/+19.25%/+66.26%/+4.10%, and +14.44%/+21.53%/+76.55%/+1.16% in the second quarter. The decline in the company's profit margin is mainly due to depreciation and amortization of fixed costs and an increase in the share of period expenses due to a decrease in the sales volume of the company's products.

The company's net cash flow declined year over year, and inventory growth slowed marginally. The company's net operating cash flow for the first three quarters of 2023 was -281 million yuan, a year-on-year decrease of 167 million yuan; the 3Q23 company's net operating cash flow was -124 million yuan, a year-on-year decrease of 153 million yuan. As of 3Q23, the company's inventory totalled 938 million yuan, up 49.6% year on year and 0.97% month on month. Inventory increased significantly compared to the same period last year, but growth slowed marginally from the second quarter; the company's contract debt was 35 million yuan, up 133.33% year on year, down 14.63% month on month.

By embracing an open market, we are optimistic about the future improvement of the company's market competitiveness. On the “surface” side, we will continue to develop new products, improve the cost performance ratio of general-purpose CPU chips, and improve the software ecosystem. The company continues to promote research and development of new products. The company will support machine manufacturers to release 3A6000 machine products, and GPGPU plans to deliver the film in 24 years. In terms of “points”, the company focuses on segmentation and makes key breakthroughs in opening up the market. Since 2022, the company has focused on deploying MCUs for hardware and electronics applications, SoCs for printer applications, storage servers, and cloud terminal system solutions.

Investment recommendations: Revenue for 2023-2025 was 709/10.85/1,650 million yuan, up -4.0%/53.0%/52.1% year on year, and net profit of -2.02/0.21/288 million yuan respectively, maintaining the “buy” rating.

Risk warning: Product development progress falls short of expectations; market expansion falls short of expectations; market competition intensifies.