Net profit to mother in the fourth quarter reversed month-on-month losses; optimistic about the long-term competitiveness of the company IDM, Silan Micro's revenue in 2023 was 9.34 billion yuan, up 12.8% year on year, and net profit to mother - 0.4 billion yuan, turning a year-on-year loss. Among them, 4Q23 revenue was 2.44 billion yuan, up 19.8% year on year, and net profit to mother was 150 million yuan, reversing losses month-on-month; the number of inventory turnover days fell 8 days from month to month, and inventory consumption in the consumer/industrial sector progressed smoothly. Taking into account the improvement in downstream demand since 4Q23, the company's inventory level has declined, and adjusted expectations for changes in fair asset value, we raised our 2024/2025 net profit forecast to RMB 3.02/573 million (previous value: RMB 245/445 million yuan), and forecast net profit to mother of RMB 914 million in 2026. Based on the 24-year net asset forecast of 7.41 yuan per share, we gave the company 3.0 x 2024E PB, a 2.3 x premium compared to the company's average, mainly due to the company's forward-looking layout in 12-inch production lines, SiC, etc., and raised the target price to 22.23 yuan (previous value: 20.48 yuan) to maintain an “gain” rating.

4Q23 review: Net profit to mother reversed losses month-on-month, and inventory turnover days fell month-on-month. Silan's revenue in 2023 was 9.34 billion yuan, up 12.8% year on year. Among them, integrated circuit/discrete devices/LED business revenue increased 14.9%/8.2%/1.3% year over year. Net profit attributable to mother - 40 million yuan, which turned into a loss year on year. The main reasons: 1) the price of financial assets fell, resulting in a net loss of 450 million yuan after tax due to changes in fair value; 2) the downstream boom in discrete devices/LEDs is weak, and price competition is fierce. 4Q23's revenue in a single quarter was 2.44 billion yuan (yoy +19.8%; qoq +0.7%), with a gross profit margin of 18.9%, down 2.9 pp from month to month, mainly due to increased competition in the power semiconductor market. Net profit attributable to mother was 150 million yuan (yoy -44.80%; loss reversed month-on-month). In 4Q23, the company's inventory turnover fell 8 to 84 days, reflecting a month-on-month improvement in demand in downstream consumer/industrial sectors, and inventory began to be eliminated.

2024 outlook: Optimistic about IDM's long-term competitiveness to help the company get through the cycle. Considering the intensification of competition in the industry, we believe that in 2024, the price of power materials in the automotive grade/photovoltaic sector will still be in a downward channel, and the prices of medium- and low-voltage products may stabilize. We are optimistic about the company: 1) the forward-looking layout of SiC main drive modules is expected to be launched in batches; 2) the company's IDM model has more advantages in pricing, special process development, and product stability, which is expected to help the company get through the cycle.

The target price was raised to $22.23 and the increase rating was maintained

Taking into account the improvement in downstream demand since 4Q23, the company's inventory level has declined, and adjusted expectations for changes in fair asset value, we raised our 2024/2025 net profit forecast to RMB 3.02/573 million (previous value: RMB 245/445 million yuan), and forecast net profit to mother of RMB 914 million in 2026. Based on the 24-year net asset forecast of 7.41 yuan per share, we gave the company 3.0 x 2024E PB, a 2.3 x premium compared to the company's average, mainly due to the company's forward-looking layout in 12-inch production lines, SiC, etc., raising the target price to 22.23 yuan (previous value: 20.48 yuan) to maintain the “gain” rating.

Risk warning: The semiconductor cycle is declining, the recovery in terminal demand falls short of expectations, and the 12-inch production capacity climb falls short of expectations.