Matters:
On March 22, 2024, the company released its 2023 Annual Report:
1) 2023: Operating income of 3,536 billion yuan, -0.07% year on year; gross profit margin of 61.21%, -3.46pct; net profit to mother of 719 million yuan, or -33.18% year on year; net profit after deduction of 572 million yuan to mother, -43.84% year on year
2) 2023Q4: Operating income of 798 million yuan, -4.37%/-15.25%; gross profit margin of 49.67%, year-over-month -13.85pct/ -10.10pct; net profit to mother of 0.69 million yuan, -68.14%/-65.47% yoy; net profit after deducting net profit of -0.31 million yuan, year-on-month loss.
Commentary:
The pressure on the civilian goods business led to a year-on-year decline in performance, and the high-reliability business maintained a high growth trend. The company's consumer products business is under pressure. In 2023, the security and identification chip/smart meter chip/integrated circuit testing service business achieved revenue of 8.63/2.74 billion yuan, respectively, or -11.62%/-53.96%/-15.44% compared with the same period last year. Under the pioneering advantage of technology, the company's high-reliability business maintained high growth. Driven by high-reliability business, the company's non-volatile memory/FPGA and other chip businesses achieved revenue of 10.72/1,131 billion yuan respectively in 2023, +14.03%/+44.80% over the same period last year. Under the influence of product structure and price adjustments for some products, the company's gross margin declined year-on-year. Looking ahead, the company's performance is expected to return to a growth trajectory as the volume of high-reliability new products combined with the recovery of downstream demand such as MCUs.
The company's leading edge in high-reliability business technology is remarkable, and product differentiation remains in strong demand. The company took the lead in successfully developing 100 million gate level FPGA, 1 billion gate level FPGA and PSoC chips in China. Since the launch of PSOC chips in 2021, the annual revenue growth rate has remained above 50%. In 2023, 440 million yuan of FPGA and other chip business revenue was contributed by PSoC products. The volume of high-end products enabled the company to maintain a leading competitive advantage. In recent years, FPGA and other chips have maintained high revenue growth. The company is promoting next-generation FPGAs and intelligent reconfigurable SoCs based on 1xnmFinFET advanced manufacturing processes. With technological advantages, the company continues to benefit from the trend of localization, and the gradual launch of new products will provide the company with continuous growth impetus.
The company's MCU and other businesses have gradually broken out of their trough, and product upgrades are expected to return to the growth trajectory. Since the second half of 2022, the company's MCU and non-volatile memory business has been under great pressure, and the pressure on the consumer goods business has had a significant impact on the company's short-term performance. With the gradual completion of the industry's inventory removal, the company's MCU and other products have gradually broken out of the industry's trough, and security and identification chips and smart meter chips have gradually recovered since the second half of 2023.
The three major product lines of safety and identification chips, non-volatile memories, and MCUs have all entered the automotive electronics field. As the product structure and customer structure continue to be optimized and upgraded, future performance growth is worth looking forward to.
Investment advice: As an established IC design company, the company continues to benefit from domestic replacement opportunities, and FPGAs have entered the harvest period. Considering that the recovery in downstream demand falls short of expectations, we lowered the company's 2024-2025 net profit forecast from 937/1,083 million yuan to 838/1,057 million yuan, corresponding EPS to 1.02/1.29 yuan, and added the 2026 net profit forecast to 1.270 billion yuan, corresponding to EPS of 1.55 yuan. Referring to the industry's comparable company valuation and its own performance growth rate, we gave the company 38 times PE in 2024, corresponding to a target price of 38.9 yuan/share, maintaining a “strong” rating; the company was given a discount rate of 40% for AH shares, that is, 15.2 times PE in 2024, corresponding to a target price of HK$17.1 per share, maintaining a “strong push” rating.
Risk warning: downstream demand falls short of expectations; new product launches fall short of expectations; production capacity support falls short of expectations; risk of changes in the external trade environment.