Storage prices are picking up, and the company's revenue for the third quarter in a single quarter increased 66.6% year on year. The company mainly develops storage module products using storage particles as raw materials. The products include embedded storage, solid state drives (SSD), memory sticks, and mobile storage (U drives, memory cards). Affected by market weakness, the operating profit of all granule manufacturers in the first half of the year fell into a negative range. The lengthening of the downturn in the industry led to a year-on-year decline in the company's performance in the first three quarters: revenue of 6.58 billion yuan (YoY -0.73%), net profit of 883 million yuan (YoY -521.77%), and gross profit margin of 2.62% (YOY-12.86pct). In the third quarter, with the recovery of storage prices and product expansion, the company's single-quarter revenue reached a record high of 2,882 billion yuan (YoY +66.62%, QoQ +29.0%), net profit of 287 million yuan (YoY -78.2%, QoQ +9.05%) and losses narrowed; gross profit margin of 4.94% (YOY-5.19pct, QoQ+4.41pct) rebounded month-on-month.

Due to the effects of production cuts, storage prices gradually picked up, and LEXAR's revenue in a single quarter increased 89.7% year over year. As a storage module manufacturer, the company's profitability is highly correlated with storage prices. According to CFM price data, storage spot prices represented by flash memory wafers continued to rise from July to October, and the supply side was greatly optimized under the influence of active production cuts by the original manufacturer. Taking Samsung as an example, the 3Q23 storage business revenue increased 17% month-on-month. As the market picked up, the company's Lexar brand expanded channels in overseas markets such as Europe, the Middle East, India, and Latin America, etc., and increased its share in the Middle East, Oceania, South Asia, etc., and revenue increased 89.7% year-on-year in a single quarter. In addition, the company's embedded storage sales increased 43,8% year over year, and solid-state drive sales increased 192.2% year over year.

The enterprise-grade storage and ICT industry brings multiple growth opportunities for the company. Overseas manufacturers still hold more than 70% of the market share of enterprise-grade solid-state drives in China, and with data security and controllable demand for domestic memory, there is more than 100 billion yuan of domestic replacement space in the innovation market. At present, the company's enterprise-grade solid-state drives and memory stick products have been verified by some potential customers. They have passed certification from important customers including Lenovo, JD Cloud, and BiliBili, and obtained official orders from some customers to achieve mass production and shipment. In the future, it will gradually bring new growth to the company's performance growth.

Self-developed master control and small-capacity memory chips continue to advance, and the company's product planning capabilities are gradually improving. As the brain of the memory, the main control chip plays a key role in performance performance. The company has invested a small amount in foreign investment with main control chip companies such as Lianyun Technology, while also supplementing the development of SD cards and eMMC master control chips. In addition, the company developed its own small-capacity memory chip SLC NAND to expand multi-specification products. Currently, products with capacities such as 512 Mbit, 1 Gbit, 2 Gbit, 4 Gbit, and 8 Gbit have been mass-produced, with a cumulative shipment volume of over 15 million units.

Investment suggestions: Due to the lengthening of the bottom of the storage cycle, the pace of price recovery is lower than our previous expectations. Based on the company's operating conditions in the first three quarters, the net profit forecast for 23-25 is expected to be -9.09/2.98/491 million yuan (previous value: 1.86/4.12/577 billion yuan), corresponding to 143/87 times PE in 24-25, maintaining the “increase in holdings” rating.

Risk warning: demand in the storage industry falls short of expectations, new product releases fall short of expectations, etc.