Incident: The company announced its 2023 annual results forecast. It is expected to achieve revenue of 714 million yuan in 2023, an increase of 12.06% year on year; net profit due to mother is expected to be -0.28 billion yuan in 2023, turning a year-on-year loss; it is expected to deduct non-net profit of -88 million yuan in 2023, turning a year-on-year loss. Among them, Q4 is expected to achieve revenue of 250 million yuan in a single quarter, up 94.11% year on year and 42.31 month on month; net profit due to mother is expected to be -022 million yuan, increasing year-on-year losses and decreasing month-on-month losses; and deducted non-net profit of -47 million yuan, increasing losses year on year and month over month.

Shipments reached a record high in 23, and the decline in product unit prices put pressure on profits: in 2023, the company's revenue increased year-on-year, mainly due to the company's shipment volume reaching a record high in 2023, with an overall shipment volume of nearly 1.8 billion units, an increase of more than 60% over the previous year. The company's profit turned into a year-on-year loss in 2023. The main reasons are: 1. The downturn in the downstream terminal market sentiment and demand, combined with the generally high inventory level in the industry, and fierce market competition; 2. The company took the initiative to lower product prices to occupy the market. Coupled with the long chip production cycle, the goods produced were all high-cost inventory products, causing the company's gross margin to drop by 20 pcts, further affecting the company's profit.

In 2023, Q4's revenue increased year-on-year and month-on-month, mainly due to downstream inventory consumption and a recovery in terminal demand. The company's chip shipments further increased, with shipments of nearly 600 million units in a single quarter, and product prices and gross profit rebounded. We believe that although profits are under pressure due to the reduction in product prices, the company is expected to continue to benefit from the recovery in market demand, and we are optimistic about the company's future performance growth.

Deeply involved in the field of chip design and actively expand industrial control products: The company has been deeply involved in the field of chip design for more than 20 years, continuously expanding independent design capabilities, and has accumulated more than 1,000 independent IPs. It has the characteristics of comprehensive technology, rich product line, perfect talent team building, and high supply chain guarantee. The company has mastered the design capabilities of mainstream MCU series, high-precision simulation, power devices, wireless radio frequency, high-performance touch, and underlying core algorithms; the company's products can be put into production in 55 nm to 180 nm CMOS processes, 90 nm to 350 nm BCD, high voltage 700V drives, bipolar, SGT MOS, IGBT, etc. The company continues to improve product quality to meet the expansion of product applications from consumer level to industrial control level. The company achieved mass production for the BAT32G127 series of industrial control main control MCUs. It has an ultra-low power LCD display driver module, which is suitable for three meters, measurement, and IoT applications, such as water meters, gas meters, heat meters, voltmeters, ammeters, pressure meters, gas alarms, and combustible gas detectors. The company's STAR-MC1 products and BAT32G439 products for industrial control and home appliances are suitable for fields with high computing power requirements, such as the main control of outdoor air conditioners. For brushless motor control, the company launched CMS32M65XX series products for electric tools and CMS32M67 series products for electric two-wheelers and high-fan vacuum cleaners, effectively reducing BOM costs and improving overall performance.

Continued to benefit from the recovery in terminal demand, automotive products are progressing smoothly: According to IC Insights data and forecasts, the global MCU market size in 2021 was about US$19.6 billion, up 23.4% year on year, and is expected to reach US$27.2 billion by 2026, with a broad market space. Beginning in the fourth quarter of 2023, downstream inventory continued to be consumed, and terminal demand gradually recovered. The company said that in the fourth quarter, there were some urgent orders for MCU products, and some products in the fields of consumer electronics, home appliances, industrial control, automotive electronics, etc. were in short supply. In the first three quarters of 2023, the company's product shipments increased in all fields. The largest shipment volume was in the consumer electronics sector, followed by household appliances; by the fourth quarter, the company's chip shipments increased further. In the field of automotive electronics, the company's automotive-grade MCU BAT32A series products have been further expanded. BAT32A233, an ultra-cost-effective product for body control and automotive DC brushless motor applications, has been tested in many Tier 1 companies, and the market response is good; BAT32A337, the first domestic product that satisfies AEC-Q100grade0, is certified by a third party agency SGS, and the operating temperature of this product is -40°C to 150°C, suitable for complex automotive operating conditions and harsh environments, and will be mainly used for automotive thermal management applications. As of September 13, 2023, the company's automotive-grade products have mass-produced 3 wafers and more than 10 product models, mainly introduced into the field of body control, including central control displays, car windows, seats, headlights, tire pressure, charging, etc. The company has two major series of chips that have passed AECQ100grade1 certification; the company's automotive grade chips have formed a serialized, scenario-based, and platform-based development advantage. The company actively lays out high-end domain-controlled MCU chips, semi-full bridge drive and pre-drive chips for cars Nationwide chip production Solutions move forward. The company's vehicle specification products have been introduced to terminal customers such as Cyrus, Changan, and Geely.

Lowering profit forecasts and maintaining “gain” ratings: The company continues to iteratively upgrade existing products, continuously enrich the product matrix, enhance its advantages in the consumer electronics field, and expand applications in the industrial and automotive electronics fields. As market demand picks up, the company's product prices are expected to rise, and the company's performance is expected to improve.

Downstream terminal market sentiment and demand recovery fell short of expectations. Coupled with market competition still fierce, the company's profit was under pressure due to the reduction in product prices in '23. We lowered our profit forecast. We lowered our profit forecast. We expect the company's net profit to be -0.28 billion yuan, RMB 24 million, and RMB 44 billion respectively. EPS was -0.07 yuan/share, 0.06 yuan/share, 0.11 yuan/share, and PE was 273X and 148X respectively in 24-25.

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