Incident: On April 2, 2024, the company released its 2023 annual report. In 2023, the company achieved operating income of 108,75975 million yuan, a year-on-year decrease of 38.63%; realized net profit to mother - 43.7742 million yuan, a year-on-year decrease of 170.44%.

Weak terminal demand compounded high corporate inventories, putting pressure on performance. 2023Q4 achieved operating income of 54.0288 million yuan, down -89.01% year on year; realized net profit of 6.962 million yuan, down 130.22% year on year, narrower than 2023Q3 (-16.6686 million yuan) by 9.7044 million yuan; the sharp decline in 2023 performance was mainly due to the imbalance in the storage market due to poor terminal demand and high corporate inventory levels since 2022H2, which led to a decline in the price of storage products, and the average decline in the company's operating income and gross margin levels . Furthermore, during the reporting period, the company's housing rental revenue, patent revenue, and government subsidies declined year-on-year, resulting in a decrease in net profit compared to the same period last year. By business, in 2023, the company's flash memory control chips/flash memory application products/mobile storage products/patent license revenue/housing rental achieved revenue of 32,847.80/73,175.90/1,067.58/616.44/10.3473 million yuan, a year-on-year decrease of 50.80%/28.84%/49.82%/64.89%/71.44%. The revenue from storage-related products was mainly affected by the decline in storage prices; Among them, the gross margins of flash memory control chips/flash memory application products/mobile storage products were respectively 5.40%/9.85%/5.91%, up +0.87/-0.13/ -1.28pct from the same period last year; in terms of profit, the company's gross margin of sales in 2023 was 9.34%/-4.28%, a decrease of -1.01/-7.79pct from the same period last year; we believe that with the overall rise in storage price products since 2023Q4, the company's future performance is expected to turn losses into profits by adjusting operating strategies and controlling costs.

The main storage industry actively innovates research and development to accelerate product expansion. 1) In terms of solid state drives, as of 2023, the company currently has a complete PCIe 4.0 solid state drive product line and is developing a new generation of PCIe 5.0 solid state drives. At the same time, actively promote product application software development to increase product added value and enhance product competitiveness; 2) In terms of memory products, accelerate the development layout of different types, different frequencies, and especially ultra-high frequency products to meet the requirements of consumer and industry-level host products for high-performance storage accessories, and continue to promote DDR5 memory product research and development; 3) In terms of memory cards, along with the accelerated construction and development of the Internet of Things and smart cities, and the popularity of graphic and video content creation continues to rise. The market demand for high-performance memory cards is increasing, and the company continues to develop higher-performance data storage solutions to meet the differentiated needs of customers. We believe that the company focuses on its main business storage and actively explores new categories, and is expected to benefit from increased demand in different downstream scenarios to drive the company's continued release of new products.

Lay out the entire computing power industry chain in Shaoguan and sign major contracts to develop together. 1) Choosing a location in Shaoguan to jointly build a storage base in Guangdong, Hong Kong and Macau: On March 20, 2024, the company issued the “Notice on Signing a Strategic Cooperation Framework Agreement with Yiheng Chuangyuan”. The announcement stated that Lanco Technology signed the “Guangdong-Hong Kong-Macao Greater Bay Area Storage Industry Base Project Strategic Cooperation Framework Agreement” with Shaoguan Jinye Development Co., Ltd., an indirect shareholder of the company. The purpose of this cooperation is to promote the popularization and application of localized high-performance enterprise-grade data storage products. Relying on Yiheng Chuangyuan's long-term technology accumulation in enterprise-grade SSD (PCIe) products, the company established a Guangdong-Hong Kong-Macao storage base project in Shaoguan to develop enterprise-grade SSD (PCIe) products, effectively support the construction of national hub nodes with localized equipment, and radiate the data center market in the “Belt and Road” countries; 2) The four parties joined hands to build the Guangdong-Hong Kong-Macao Greater Bay Area computing power industry ecosystem: On February 7, 2024, the company released “About ZTE and ZTE” Wait for the three parties to sign “Notice of Cooperation Agreement”. The announcement stated that Lanco Technology signed the “Shaoguan Municipal People's Government ZTE Co., Ltd. Shenzhen Langke Technology Co., Ltd. Guangdong Shaoguan Data Industry Investment and Development Co., Ltd. Cooperation Agreement” with the Shaoguan Municipal People's Government, to cooperate in building a computing power industry ecosystem, improving the level of data center construction, and in-depth cooperation in digital transformation.

Specifically, in building a computing power industry ecosystem, the Shaoguan Municipal People's Government has adopted industrial development policies to promote the application of ZTE server products, Lanco Technology server manufacturing, and the implementation of Lanco's digital investment informatization functions; in improving the level of data center construction, according to the Shaoguan Municipal People's Government's “East Digital and Western Computing” Shaoguan data center cluster construction plan and layout, all parties cooperate to actively participate in major data center projects; in in-depth digital transformation cooperation, all parties provide the Shaoguan Municipal People's Government and its key industrial fields covering operating systems, databases, cloud computing, server storage, network products, and clouds A full range of products and solutions, such as video products and secure terminals, are cooperating to promote high-quality development in the fields of intelligent computing, networking and innovation in the Guangdong-Hong Kong-Macao Greater Bay Area, and help Shaoguan achieve comprehensive digital transformation. We believe that as a local storage enterprise in Shaoguan, the company is expected to rely on the Shaoguan Municipal People's Government and various industrial forces to work together to build the entire Shaoguan computing power industry chain, and continue to be optimistic about the company's long-term value.

Profit forecast and investment rating: We predict that the company's net profit for 2024-2026 will be 0.53/1.05/166 million yuan, and the current stock price will be 102/51/32 times PE in 2024-2026, respectively. Given that the company's storage products are expected to benefit from the construction of the Shaoguan data center industry cluster, future performance is expected to achieve rapid growth and maintain a “buy” rating.

Risk warning: Risk of innovation or product updates falling short of expectations, risk of fluctuating raw material prices, risk of market competition, risk of exchange rate fluctuations, falling short of expectations in the Shaoguan data industry cluster business development, and memory chip supply risk.