occurrences

On February 23, the company announced the 2024 restricted stock incentive plan (draft). The assessment indicators include operating income and total market value for each year (total market value corresponding to the company's average trading price for 20 consecutive trading days, same below).

Key points of investment

The matrix layout of product lines such as embedded storage is complete. Following the upgrade direction of large memory capacity, high bandwidth, low latency, low power consumption, high security, and small size, the company continues to innovate in six major application fields, including mobile smart terminals, PCs, industry terminals, data centers, smart cars, and mobile storage, and has created a full range of differentiated product systems and services, mainly including four major sectors: embedded storage, consumer storage, industrial storage, and advanced sealing and testing services. The company specializes in the field of semiconductor memory and has laid out a complete product line matrix such as embedded storage (UFS, eMMC, LPDDR, eMCP, BGA SSD, etc.), solid state drives (SATA/PCIe), memory modules (SODIMM, U-DIMM, R-DIMM), memory cards (SD cards, CF cards, CFast cards, CFExpress cards, NM cards), etc., covering all major categories of NAND Flash and DRAM memories. The company has a complete line of general-purpose memory products to meet the needs of end customers for standardized and large-scale memory products; at the same time, it also provides “thousands of ends” customized storage solutions for market segments. The company has developed a complete semiconductor memory product development advantage, and can rapidly iteratively upgrade products according to customer market needs and the evolving trend of downstream applications. While supporting customer business, it also promotes the continuous improvement of the company's core technology, so that the company's product system always meets market and customer needs.

The advantages of integrated R&D, sealing and testing strengthen the company's competitiveness. The company is mainly engaged in R&D, design, packaging testing, production and sales of semiconductor memories. The company closely revolves around the semiconductor memory industry chain and has built an integrated R&D and testing business model. It has core competitiveness in storage medium characteristics research, firmware algorithm development, memory chip packaging and testing, testing and development, global brand operation, etc., and actively lays out technical fields such as chip IC design, advanced packaging and testing equipment development. The company uses its subsidiary Huizhou Baiwei as an advanced sealing, testing and memory manufacturing base. Huizhou Baiwei specializes in memory sealing and SiP sealing and testing. Currently, it mainly serves the parent company's sealing and testing needs. Huizhou Baiwei's packaging process is leading in China. Currently, it has advanced process mass production capabilities such as 16 laminated dies, 30-40 μm ultra-thin dies, and multi-chip heterogeneous integration, and has reached a world-class level. At the same time, the company has independently developed a series of memory chip testing equipment and test algorithms, and has a one-stop memory chip testing solution. Huizhou Baiwei can currently provide foundry services in the form of hybrid BGA (WB+FC), WB BGA, FC BGA, FC CSP, LGA, and QFN. In the future, as production capacity continues to expand, Huizhou Baiwei will use surplus production capacity to provide foundry services to memory manufacturers, IC design companies, and wafer manufacturers, forming a new business growth point.

Long-term stable cooperation+independent integration of the main control chip supplier requires the definition of the main control chip architecture to further enhance the competitive advantage. According to the characteristics of its own production process and terminal memory product requirements, the company has established a complete supplier procurement system: the raw materials involved in the production process mainly include NAND Flash wafers, DRAM wafers, main control chips, substrates, etc.; the raw materials involved in the production process of module products mainly include NAND Flash chips, DRAM chips, main control chips, PCBs, etc., of which NAND Flash chips are mainly provided by the company's chip packaging production module. The main controller is one of the core components of semiconductor memory. In the field of main control chips, the company has established long-term and stable cooperative relationships with mainstream master control chip suppliers in the industry such as Huirong Technology, Lianyun Technology, and Yingren Technology. The company continues to cooperate closely with major suppliers to continue to provide downstream customers with high-quality and stable supply of semiconductor memory products. At the same time, the company has the ability to define the main control chip architecture based on algorithm requirements to improve algorithm efficiency and achieve hardware acceleration and performance optimization based on application scenarios, and further enhance the competitive advantage of products in smart wearable, enterprise-level, and vehicle-level scenarios.

Include revenue and market value at the same time as equity incentive assessment goals. On February 23, the company announced the 2024 restricted stock incentive plan (draft). For the first time, the incentive plan grants incentives to no more than 10 people, who are directors, senior managers and core technical/business personnel of the company (including branches and holding subsidiaries), shareholders, actual controllers of the company and foreign personnel, excluding independent directors and supervisors of the company; it is intended to grant a total of 30 million shares of Class II restricted shares to incentive recipients, accounting for 6.97% of the company's total share capital of 433.291.36 million shares at the time the draft incentive plan was announced. Of these, 24 million shares were granted for the first time, and 6 million shares of equity were reserved. The assessment indicators include operating income and total market value for each year. As shown in the table below, the trigger value (A) of the annual operating income and total market value assessment target (A) for the first vesting period is that the company's revenue in 2024 is not less than 4.5 billion yuan, and the total market value of the company reaches or exceeds 18 billion yuan for any 20 consecutive trading days in 2024; the target value (Am) is the company's revenue of not less than 5 billion yuan in 2024, and the total market value of the company reached or exceeded 20 billion yuan on any 20 consecutive trading days in 2024. In terms of expenses, the total estimated amortization of restricted stocks first granted under this incentive plan (assuming the grant date is early April 2024) is $176 million, of which $7062.30/6387.00/3425.10/6.936 million yuan is 2024/2025/2026/2027, respectively, which has little impact on net profit for each year.

Investment advice

We expect the company to achieve revenue of 36/48/6.3 billion yuan in 2023/2024/2025, respectively, and achieve net profit of 5.88/1.17/213 million yuan respectively. Profitability will gradually recover and be covered for the first time, giving it a “buy” rating.

Risk warning

Risk of R&D failure, risk of loss of core technology, risk of loss of technical personnel, risk of changes in macroeconomic environment and decline in performance, risk of fluctuating raw material prices, risk of high supplier concentration, risk related to brand licensing business, risk of fluctuations in gross margin and performance due to fluctuations in memory product prices, risk of large inventory amounts and falling inventory prices, risk of negative net cash flow from operating activities, macro-environmental risk.