Key points of investment

On April 12, 2024, the company released the 2023 Annual Report and the 2024 Restricted Stock Incentive Plan (Draft).

Sluggish market demand in the industry put pressure on annual results. The profit side achieved month-on-month growth in 23Q4. As industry market demand was sluggish and inventory pressure further suppressed customer procurement demand, the company's performance in 2023 was under pressure. The company achieved annual revenue of 4,531 billion yuan, a year-on-year decrease of 16.28%; net profit to mother of 537 million yuan, a year-on-year decrease of 31.93%; net profit after deducting non-return to mother of 491 million yuan, a year-on-year decrease of 34.23%; gross profit margin of 37.10%, a year-on-year decrease of 1.46 percentage points; and R&D investment of 718 million yuan, an increase of 9.61% year on year.

Looking at a single quarter, 23Q4 achieved revenue of 1,111 billion yuan, a year-on-year decrease of 6.85% and a month-on-month decrease of 7.31%; the month-on-month decline in revenue was mainly due to a weakening demand for 23Q4 computing chip stocking. 23Q4 net profit to mother was 169 million yuan, up 193.56% year on year, up 15.43% month on month; net profit without return to mother was 145 million yuan, up 377.49% year on year, up 3.08% month on month; gross profit margin was 38.38%, up 0.14 percentage points year on year and 1.27 percentage points month on month.

At the same time, the company released the 2024 Restricted Stock Incentive Plan (draft). This incentive plan aims to grant a total of no more than 4.32 million shares of restricted shares. For the first time, a total of 351 incentive recipients will be awarded at a price of 31.09 yuan/share.

For the first time, some of the assessment targets were awarded based on 2023 and required the 2024-2026 product sales growth rate or net interest rate growth rate not less than 5%/10%/15%. The total amount to be amortized for the initial grant amount to be amortized was $127 million, and $0.43/0.52/0.25/0.07 billion for 2024-2027, respectively.

Inventory removal is driving market recovery, and continuous process iteration broadens growth space. As inventory in the industrial chain is further removed, more consumer market sectors are expected to enter an upward channel and push the overall consumer market into a healthy stage of development. Industry market demand is also expected to gradually pick up in 2024.

Computing chips: In 2023, computing chips achieved revenue of 1,108 billion yuan, up 43.91% year on year, accounting for 24.46% of revenue; gross profit margin was 27.95%, a decrease of 2.52 percentage points year on year. In 2023, the company achieved mass production of the X2600; R&D, commercialization, and mass production of the T23 have all been completed.

Memory chips: In 2023, memory chips achieved revenue of 2,912 billion yuan, a year-on-year decrease of 28.19%, accounting for 64.26% of revenue; gross profit margin was 36.48%, which was basically the same as the previous year. The company has now achieved mass production of the 8G LPDDR4. In terms of process, according to the company's April 2024 investor survey minutes, the company's latest DRAM process is 25nm.

The company is actively developing DRAM technology and product research and development for next-generation processes to provide DRAM products with higher capacity and higher cost performance. Product application areas and growth space will be further expanded.

Analog and connected chips: In 2023, analog and connected chips achieved revenue of 409 million yuan, a year-on-year decrease of 14.58%, accounting for 9.03% of revenue; gross profit margin was 51.34%, a year-on-year decrease of 1.65 percentage points. In 2023, the company carried out the development and launch of a variety of matrix-type and high-brightness LED driver chips with different processes and types for the automotive and non-automotive markets, and also released a variety of automotive-grade LED driver chips. In terms of connected chips, automotive-grade LIN SBC and CAN SBC began to send samples to customers; GreenPhy achieved mass production, and some customers introduced and implemented products.

Investment advice: In light of the current recovery in industry market demand, we have adjusted our original 24/25 performance forecast. From 2024 to 2026, the company's revenue is estimated to be $51.56/62.34/7.357 billion yuan, respectively (the original forecast value for 24/25 was 58.76/7.062 billion yuan), with growth rates of 13.8%/20.9%/18.0%, respectively; net profit to mother of 7.02/9.21/1,218 billion yuan (the original forecast value for 24/25 was RMB 802/1.78 billion), respectively, with growth rates of 30.6%/31.2%/32.3% for PE, respectively 23.9. The company's three product lines are becoming more mature, and computing chips continue to launch highly competitive chips. Memory chips and analog and interconnection chips are expected to return to the growth track as industry market demand recovers. Continued recommendation, maintaining a “buy” rating.

Risk warning: Downstream terminal market demand falls short of expectations; risk that new technologies, new processes, and new products cannot be industrialized as scheduled; market competition increases risks; systemic risks, etc.