2023 results are in line with market expectations
The company announced its 2023 results: operating income of 3,536 billion yuan, -0.07% year on year; realized net profit to mother of 719 million yuan, or -33.18% year-on-year. Looking at a single quarter, 4Q23 achieved operating income of 798 million yuan, -4.37% year-on-year, and -15.25% month-on-month; net profit to mother was 0.69 million yuan, up -68.14% year-on-year, and -65.47% month-on-month. The results are in line with market expectations.
Development trends
The FPGA business is growing rapidly, and the fragmentation of product lines is putting pressure on profitability. 1) By product, the FPGA business maintained a rapid growth trend, achieving revenue of 1,131 billion yuan, +44.80%, and the revenue share increased from 22.07% in 2022 to 31.98%; the security and identification chip/smart meter chip business achieved revenue of 883/274 million yuan respectively, -11.62%/-53.96% YoY, mainly due to adjustments in industry demand and inventory elimination. 2) On the profit side, affected by downstream demand adjustments such as consumer electronics, etc., the company's product line was somewhat differentiated. The gross margin in 2023 was -3.46ppt to 61.21% year-on-year, and the net margin was -10.08ppt to 20.35% year-on-year due to cost expansion.
Increased R&D consolidates leading edge, and high inventory growth strengthens supply chain safety and stability. 1) The company's expense ratio for the 2023 period was +9.82ppt to 40.61% year over year, mainly due to R&D expenses +7.80ppt to 28.58% year over year. The number of R&D personnel at the end of '23 was +33% to 1,178. The next-generation EEPROM design platform obtained batch verification, and the FPGA chip spectrum and supporting software development were further improved. We believe it is expected to consolidate the company's leading edge in high-end FPGAs and other products. 2) The net cash flow from the company's operating activities in 2023 was 708 million yuan, mainly due to the increase in safety stocks of some products and the consolidation of supply chain security. At the end of 23, the company's inventory was 3.177 billion yuan, an increase of 114% over the end of '22.
We continue to benefit from the expansion of the high-end FPGA market and build platform-based IC design companies with diverse layouts. 1) The company is the first joint-stock IC design and listed company in China. It is one of the first manufacturers to complete the development of billion-level FPGA chips with a 28nm process. FPGA product performance indicators have reached the leading level in China. We believe that the company can continue to benefit from domestic FPGA replacement and market expansion; 2) The company plans to issue 2 billion yuan of convertible bonds for platform development and industrialization projects for secure control chips, FPGAs, memories, etc. We believe that the convertible bond raising project has a wide range of product lines, which is expected to strengthen the company's leading edge on the technology side and build a platform-based IC design enterprise.
Profit forecasting and valuation
Considering the pace of release of the company's downstream demand, we lowered the company's 2024 net profit forecast by 28.7% to 775 million yuan, and introduced the 2025 profit forecast of 897 million yuan for the first time. The current stock price corresponds to 37.2/32.1x P/E 2024/2025. We maintain our outperforming industry ratings, are optimistic about the company's leading edge in the high-end FPGA field, and lowered the target price by 17.1% to 43.64 yuan, corresponding to 46.1/39.8x P/E in 2024/2025, with a potential increase of 24%.
risks
1) Special product price adjustment risk; 2) Market competition intensifies risk.