VeriSilicon Co., Ltd. released its 2023 annual report. Credit and asset impairment losses dragged down Q4 net profit and VeriSilicon shares released its 2023 annual report. Among them, 4Q23 achieved revenue of 573 million yuan, down 27.9% year on year, down 1.3% month on month, mainly due to the chip mass production business falling 53.1% year on year; 4Q23 maintained high R&D investment and calculated credit and asset impairment losses totaling 121 million yuan, which dragged down net profit due to year-on-year decline of 203 million yuan to -162 million yuan, which was basically the same from month to month. Considering the increase in the company's investment in strategic R&D projects such as AIGC, we lowered our 24/25 net profit forecast to 0.15/064 million yuan (previous value: 0.20/91 million yuan), but we are optimistic that long-term AI demand will drive the company's growth, which is expected to be 160 million yuan in 26 years. The chip customization/IP licensing business was assessed separately at 7.0/24.5x 24E PS (comparable to the company's average expectation of 4.7x/18.8x. The premium is mainly based on VeriSilicon being the scarce target of A-shares and has a significant competitive advantage in the HPC/AI field, but the premium rate was lowered due to higher short-term R&D investment than the same industry, which may have an impact on performance), and the target price was adjusted to 70.00 yuan to maintain the purchase.
IP business: Q4 revenue increased month-on-month, and AI demand drove GPU/NPU/VPU revenue growth. Q4's IP licensing business revenue was 244 million yuan, up 6.1% year-on-year and 100.3% month-on-month.
The number of licenses increased significantly, reaching 55 (18 in Q3). We believe that due to market demand such as AI computing power, the company's demand from data processing and end-side AI increased rapidly, and GPU/NPU/VPU revenue grew rapidly, accounting for 72% of the total revenue of the IP licensing business in 2023. In the medium to long term, we are optimistic that VeriSilicon will continue to benefit from the AIGC wave and Chiplet trends. VeriSilicon's NPUIP has been used by 72 customers in 128 AI chips in various markets, and demand for AI related IPs with advantages such as GPGPU/NPUIP is expected to maintain a rapid growth trend in the future.
Customized business: Affected by declining demand in the short term, profitability rapidly improved Q4's chip customization business revenue of 328 million yuan, down 41.6% year on year and 28.3% month on month. Mainly because chip mass production revenue (down 53.1% year on year and 34.6% month on month) was affected by declining demand in industrial, computer and peripheral fields, and demand in the Internet of Things and automotive electronics sectors was steady. However, we saw that the company had orders of 2,061 billion yuan as of the end of 2023, of which the chip design business order amount exceeded 1 billion yuan, reaching a record high. We believe that with the implementation of the company's design business project, the mass production business is expected to pick up steadily. In terms of profitability, the gross margin of the customized business reached 23.3% in 2023, an increase of 6.0 pct over the previous year, mainly due to the increase in the company's share of high-value-added projects and increased bargaining power.
Adjust the target price to $70.00 and maintain the “buy” rating
Considering the increase in the company's short-term investment in strategic projects such as AIGC, we lowered our 24/25 net profit forecast to 0.15/064 million yuan (previous value: 0.20/0.91 billion yuan), but we are optimistic that long-term AI demand will drive the company's growth. We expect it to be 160 million yuan in 26 years, corresponding to EPS of 0.03/0.13/0.32 yuan. The chip customization business/IP licensing business was given revenue of 7.0x/24.5x PS in 24 years, adjusted the target price to 70.00 yuan (previous value: 81.73 yuan), and maintained the “buy” rating.
Risk warning: risk of R&D failure, risk of localization falling short of expectations, risk of macroeconomic downturn.