Incident: The company announced its 2023 annual results forecast. It is expected to achieve revenue of 1,050-1200 billion yuan in 2023, an increase of 13.53%-29.75%; net profit due to mother is expected to be -0.42 to -63 billion yuan in 2023, turning a year-on-year loss; it is expected to achieve deducted non-net profit of -0.57 to -85 billion yuan in 2023, turning a year-on-year loss. Among them, Q4 for the single quarter is expected to achieve revenue of 283-433 million yuan, up 75.58%-168.68% year on year, with a month-on-month change of -5.26% to 44.98%; net profit due to mother is expected to be 0.39-60 million yuan, turning losses into profits year on year and month on month; and expected to reduce non-net profit of 0.26-0.54 billion yuan, turning losses into profits year over year.

Asset impairment losses were taken lightly, and Q4 profit turned into a profit: the company's revenue increased year-on-year in 2023, in line with expectations; however, the main reasons for the company's profit turned to loss were: 1. The global economic downturn in 2023 and industry sentiment had not recovered, industry inventory digestion was slow, market competition was intense, and the company adopted a pricing strategy of active price reduction; 2. Prices of the company's chip products are under pressure, and changes in OEM prices are lagging behind. The procurement prices of raw materials for the company's main products are still relatively high, leading to a year-on-year decline in the company's gross profit; 3.2023, the company calculated 110 million yuan in asset impairment losses, affecting annual profits. The main reason for turning Q4 profit into profit is that since Q4 2023, with the gradual recovery of downstream demand for consumer electronics products, etc., and the company's active expansion of market share, the company's product shipments and revenue have increased year-on-year. We believe that the company is expected to continue to benefit from the recovery in demand in the consumer electronics market; at the same time, the company is actively developing more new customers and new projects, and is expected to usher in increased shipments of corresponding products in the future. We are optimistic about the company's future performance growth.

The integrated circuit & semiconductor industry is gradually improving, and I am optimistic about the company's prospects in the field of memory chips: Driven by national policy support and market application, the domestic integrated circuit industry has maintained rapid growth. According to Semiconductor Intelligence, the semiconductor market will continue to recover in 2024, and the terminal market will grow moderately, with growth between 5% and 10%. In the future, with the phased recovery of consumer confidence and the increase in domestic demand in the semiconductor industry, various application fields will gradually recover for the better. The company has been deeply involved in the field of non-volatile memory chips for many years and has become one of the main suppliers of NOR Flash and EEPROM in China. 1) In terms of NOR Flash products: The company's NOR Flash products use SONOS and ETOX process structures, covering the operating voltage range of 1.65V-3.6V. The company's full range of products with a capacity of 4 Mbit to 128 Mbit under the 40nm process has been mass-produced. Currently, 40nm products account for more than 50% of the overall revenue of the NorFlash product line. In addition, the company has also adopted the ETOX process structure in parallel, and has reached the 50nm advanced manufacturing process. In the first half of '23, 4Mbit to 256Mbit products have been mass-produced, and 512 Mbit to 1 Gbit capacity products are being gradually launched according to the plan. Small and medium capacity NOR Flash automotive products have successively completed AEC-Q100 certification. The company launched a new generation of SPI NOR Flash series products, which support a 1.1 V power supply system and have a wide voltage range, which can cover 1.2V and 1.8V systems; 2) In terms of EEPROM products: The company has formed an EEPROM product line covering 2Kbit to 4Mbit capacity, with an operating voltage covering 1.2V-5.5V, mainly using a 130nm process. Some medium- and high-capacity products use 95nm and below processes and have achieved mass production. The company's automotive products have completed a comprehensive assessment of the AEC-Q100 standard, and have achieved batch delivery to customers at home and abroad in applications such as body cameras, in-vehicle central control, and entertainment systems. High-capacity EEPROM series products, 2Mbit products are used in batches for high-speed broadband communication and data centers. At the same time, the ultra-low voltage 1.2V series EEPROM has been mass-produced and shipped, covering 32 Kbit to 512 Kbit. It is an ultra-low voltage product line with leading process nodes in the industry and complete capacity coverage. Thanks to the development of emerging technology applications such as the Internet of Things, servers, photovoltaics, and automotive electronics, and the growth in demand in the memory chip market, the company's prospects in the field of memory chips are worth looking forward to.

Implement the “storage +” strategy and actively lay out the MCU and analog chip fields: the company implements the “storage +” strategy to achieve diversified market expansion into the field of microcontrollers and analog chips, relying on technical advantages in the storage field. According to IC Insights, the global MCU market is expected to reach approximately $26 billion in 2023, up 1.25% from 2022. In 2022, automotive electronics and industrial control accounted for 36.80% and 33.50% of the global market, respectively, while consumer electronics accounted for a relatively high share of the Chinese MCU market. With the development of industrial automation and intelligence, the acceleration of the penetration of new energy vehicles, and the trend of “marginalization” of IoT computing, the usage of MCU chips will increase significantly. 1) MCU product aspect: Based on memory advantages, the company lays out the ArmCortex-M core series 32-bit general-purpose MCU products. The company revealed in its 2023 annual report that the company's MCUM0+ series products have been mass-produced and shipped on a large scale, with a total of more than 120 product sizes, and cumulative shipments have exceeded 100 million units. Furthermore, in October '23, an ecological cooperation with IAR will fully support the company's 32-bit ArmCortex-M0+ and M4 series MCUs. In addition, the company's M4MCU prototype products based on the ARM core are progressing smoothly. In the third quarter of 2023, the company's MCU M4 products were mass-produced and shipped; 2) In terms of analog products: the company's PE series voice coil motor driver chip products with built-in non-volatile memory have been supplied in large quantities, and 1.2V PD series voice coil motor driver chip products that support the next generation of main control platforms have also entered mass production. At the same time, we rely on the customer resource advantages of EEPROM products to achieve smooth downstream delivery. The company's VcmDriver products can form a good synergy effect with EEPROM products, enhancing the company's competitive advantage and market share in the field of camera modules. As the company's “storage +” strategy continues to advance, the future will usher in new growth momentum and create new space for the company to develop.

Raise profit forecast and maintain “gain” rating: The company is actively implementing the “Storage+” strategy and continuously expanding the field of microcontrollers and analog chips. At the product level, the company mass-produced high-capacity NorFlash series products in the second half of 2023, and is currently continuing to be introduced by customers, and is expected to gradually increase in volume. In terms of MCU, the company continues to vigorously promote M0+ products to the consumer, industrial control and automotive electronics aftermarket, while continuing to promote the introduction of M4 products, which are progressing steadily in general markets such as low power consumption, high cost performance, and high performance. With the company's technical advantages and platform resources in the storage field, the company will further expand its market share and expand into high-value-added fields and diversified markets. The company is expected to continue to benefit from the recovery in demand in the consumer electronics market. Q4 net profit in 2023 was raised. We raised our profit forecast. The company's net profit for 2023-2025 is -52 million yuan, 121 million yuan, and 268 million yuan respectively, EPS is -0.68 yuan, 1.61 yuan, and 3.55 yuan respectively, and PE in 24-25 is 67X and 30X respectively.

Risk warning: Market competition risk, downstream demand falling short of expectations, risk of technology development and iterative upgrading, increased market competition