Incidents:
Fudan Microelectronics released its 2023 annual report on March 23, 2024: In 2023, the company achieved revenue of 3,536 billion yuan, a year-on-year decrease of 0.07%, and net profit to mother of 719 million yuan, a year-on-year decrease of 33.18%. After deducting net profit of 572 million yuan, a year-on-year decrease of 43.84%.
Investment highlights:
Due to industry cycles and inventory digestion, etc., 2023Q4 performance was briefly under pressure. Looking at a single quarter, 2023Q4 achieved revenue of 798 million yuan, a year-on-year decrease of 4.37%, net profit to mother of 0.69 million yuan, a year-on-year decrease of 68.14%, after deducting non-attributable net profit of -31 million yuan, which turned into a year-on-year loss.
Affected by the structural reduction in the semiconductor industry's overall production capacity and inventory digestion, demand for some chips, starting with consumer electronics, showed a downward trend, which had a great impact on the company's sales of some products in the consumer electronics and power electronics markets. The company's FPGAs and some non-volatile memories used in high-reliability scenarios benefit from advanced and reliable technology, continuous expansion in application fields and steady growth in demand from major customers. Revenue from related products has maintained steady growth, contributing greatly to the company's performance. The gross profit margin in 2023 was 61.21%, a year-on-year decrease of 3.46pct; R&D expenses increased 37.42% year-on-year. The decline in gross margin and the increase in R&D expenses have affected the company's profitability to a certain extent. In the future, with the recovery of the industry and the completion of high-end upgrades and iterations of some of the company's products, the company's performance is expected to pick up.
Actively develop 1xnm FPGAs and wait for downstream demand to recover. The company achieved revenue of 1,139 billion yuan in FPGA and other products in 2023. The company plans to develop a next-generation FPGA and an intelligent reconfigurable SoC platform based on the advanced 1x nm FinFET process to provide a product line with high performance, low power consumption, and high security for edge computing application scenarios such as field sensing.
After completion of the project, domestic reconfigurable SoC chips with strong competitiveness will be launched to further enhance the company's market position and overall competitiveness. At the industry level, major global companies have accelerated the layout and development of the FPGA market. In early March, Intel spun off its FPGA business Altera to expand business opportunities. Its Agilex series products accelerate breakthroughs, which are expected to further open up market space driven by AI. Looking at the domestic market, along with the tense situation overseas and the acceleration of domestic semiconductor substitution, the company, as one of the few domestic FPGA suppliers in the industry, will fully benefit from the expansion of the global market and the large demand space brought about by localization, and the high reliability business will continue to expand in the future.
Non-volatile memory products cross the cycle, and general-purpose MCUs accelerate breakthroughs. The company has a broad layout of storage products. Against the backdrop of a marked decline in customer demand and increased competition in the consumer electronics market, the company benefited from the early layout of storage products in the industrial market, high-reliability market, automotive electronics, etc. In particular, the high-reliability product base was stable, leading the product line through the cycle and improving product line performance. In 2023, the company's non-volatile memory product line achieved revenue of about 1,072 billion yuan. In addition, the company's MCU business continues to occupy a leading position in the smart meter field when facing factors such as falling market demand, inventory digestion, and oversupply. At the same time, the early layout of automotive electronics, smart home appliances, industrial and other fields began to grow, and products with more competitive functionality and performance were continuously introduced to expand the market share. As the M-STAR series products gradually launched in 2024 are more widely applicable, the process enters 40/55nm, and the product serialization achieves stable supply, sales are expected to increase.
Profit forecast and investment rating: The company is a leading domestic FPGA manufacturer. All product lines are highly competitive. The company's performance is expected to continue to grow in the future as market demand expands and products are iterated. Considering the degree of difficulty in product development and the company's Q4 performance falling short of expectations, etc., we adjusted our profit forecast. The company's net profit for 2024-2026 is 8.92/11.36/1,349 million yuan, respectively, corresponding to 2024-2026 PE of 29/23/19 times, respectively, maintaining a “buy” rating.
Risks indicate risks of production capacity expansion falling short of expectations; risk of changing technology routes; risk of downstream application expansion falling short of expectations; geopolitical risk; increased risk of market competition; risk of new product development falling short of expectations, etc.