Investment highlights
For the first time, Fudan Microelectronics (688385) was covered to give it an outperforming industry rating. The target price was 52.62 yuan, corresponding to 39.6x P/E in 2024. Fudan Microelectronics is the first joint stock IC design and listed company in China. It has extensive business layout such as security and identification chips, non-volatile memories, smart meter chips, FPGAs, etc., and has significant advantages in the field of high-end FPGAs. We are optimistic about the company for the following reasons:
Deeply involved in IC design for 20 years, good technical genes support the company's growth. 1) Fudan Microelectronics was founded in 1998 to design, develop, test and sell large-scale integrated circuits and provide customers with system solutions. The company was listed on the Hong Kong GEM in 2000, becoming the first domestic joint-stock IC design and listing company. 2) The company originated from the State Key Laboratory of Specialized Integrated Circuits and Systems at Fudan University. In recent years, the R&D cost rate has remained above 25%. Driven by good technology genes, the company's revenue and net profit CAGR from 2017 to 2022 were 19.5%/38.2% respectively, and the performance continued to grow rapidly.
It continues to benefit from domestic FPGA replacement, and has significant advantages in the high-end FPGA field. 1) FPGAs have field programmable characteristics and are widely used in industrial control, network communication, consumer electronics, etc. According to Frost & Sullivan estimates, China's FPGA market may reach 24.99 billion yuan in 2023, of which leading overseas companies represented by Xilinx have a total market share of 83%, and there is plenty of room for domestic alternatives. 2) The company focuses on high-end FPGA products and is one of the first manufacturers to complete the development of billion-gate FPGA chips with a 28nm process. From 2019 to 2022, the company's FPGA product revenue increased from 155 million yuan to 781 million yuan, the CAGR reached 71.3%, and the average price per unit increased from 2.27 yuan to 17.05 yuan, an increase of 650%.
Diversified layouts create IC design platform enterprises, and fund-raising and equity incentives inject momentum for sustainable development. 1) The company lays out a wide range of services such as security and identification chips, non-volatile memories, smart meter chips, etc., and collaborates with multiple businesses to build a platform-based IC design enterprise. 2) In 2021, the company issued an equity incentive plan to motivate 565 people; in 2023, the company plans to issue 2 billion yuan of convertible bonds for platform development and industrialization projects such as secure control chips, FPGAs, and memories.
We believe that broad incentives and convertible bond fund-raising can stimulate the company's operating vitality, strengthen the company's leading edge on the technology side, and inject momentum for sustainable development.
What is our biggest difference from the market? The market is concerned that the company's R&D intensity is dragging down profit levels. We believe that the company is expected to continue to benefit from the expansion of the FPGA market and maintain rapid growth, and the scale effect is expected to continue to help the company's profit level increase.
Potential catalysts: Consumer electronics demand recovery exceeds expectations; technology development progress exceeds expectations.
Profit forecasting and valuation
We expect the company's 2023/2024 EPS to be 1.00/1.33 yuan respectively. The current company stock price corresponds to 2023/2024 42.5/32.0x P/E. Based on the SOTP valuation, we covered the company for the first time and gave it a “outperforming industry” rating, giving a target price of 52.62 yuan, corresponding to 39.6x P/E in 2024, with a potential increase of 23.7%.
risks
Risk of downstream demand falling short of expectations; risk of technology iteration; deterioration of the international trade environment.