Incident: On January 30, Longxin Zhongke released its 2023 performance forecast. According to preliminary estimates by the company's finance department, it is expected to achieve revenue of about 510 million yuan for the full year of 2023, net profit to mother - about 310 million yuan, and net profit from non-return to mother - about 420 million yuan.

In terms of revenue, the company's business mainly consists of three parts: solutions, industrial control, and informatization. In the first half of the year, revenue was 1.6/110 million yuan, or +86.9%/-37.1%/-54.8% year-on-year, for a total of 310 million yuan. The company expects to achieve revenue of around 510 million yuan for the full year of 2023, or -31.2% year-on-year. Revenue declined sharply. On the one hand, it was due to external environmental factors such as an unfavorable overall macro environment and changes in the semiconductor industry cycle; on the other hand, the company's traditional dominant industrial control sector stagnated due to internal customer management issues, and the information technology e-government market was in an adjustment period, leading to a lack of volume in the company's business. Competition in the superposition market continued to intensify, and the company's business development suffered short-term setbacks.

In terms of profit, the company expects to achieve net profit due to mother - about 310 million yuan in 2023, a decrease of 360 million yuan compared to the same period last year; net profit after deducting non-return to mother - about 420 million yuan, a decrease of 260 million yuan compared to the same period last year. In terms of cost, the decline in sales volume of products in the information technology sector led to an increase in fixed cost sharing. Under the combined market development, sales prices of some products were under pressure, and the company's gross margin dropped significantly compared to the same period last year. In terms of costs, the company increased investment in R&D, continuously achieved breakthroughs in multi-thread technology, inter-chip interconnection technology, and GPGPU technology, and continued to improve the application ecosystem. The cost rate increased during the company period. Furthermore, in 2023, the company's government subsidies eligible for profit and loss recognition were lower than in the same period last year, and some customers' repayments fell short of expectations, causing credit impairment losses to increase more than in the same period of the previous year.

Short-term revenue is under pressure, and long-term attention is being paid to the progress of new server products and GPGPU development. After the company launched the 3C5000 product in 2022 to officially expand the server business, it continued to refine the product to improve cost performance. In January '24, the company said that 3C6000 had delivered the streaming film. 6000 series server products will double the performance while being lower in cost, and will be competitive in the open market. In addition, the company's second-generation self-developed graphics processor core, LG200, supports graphics acceleration, scientific computing acceleration, and AI acceleration. It will be integrated into the 2K3000 streaming plan for the first quarter of '24, based on 2K3000's GPGPU technology and 3C6000's Dragon Chain technology. The company will also develop a dedicated GPGPU in '24.

Profit forecast and investment advice: We expect the company's revenue for 2023-2025 to be $51/7.3/1.05 billion yuan, an increase of -31.1%/43.8%/43.1% year-on-year, and adjusted net profit to mother of -3.1/-1.4/10 billion yuan, respectively, maintaining a “buy” rating.

Risk warning: Product development falls short of expectations, domestic and foreign policy adjustments risk, domestic substitution progress falls short of expectations, and market competition intensifies.