Incident: Recently, the company released its 2023 annual report. In 2023, the company achieved revenue of 4.531 billion yuan, -16.28%; net profit to mother of 537 million yuan, or -31.93% year-on-year; net profit after deducting non-return to mother of 491 million yuan, or -34.23% year-on-year. The fourth quarter of 2023 achieved revenue of 1,111 billion yuan in a single quarter, -6.85% YoY, -7.31%; net profit to mother of 169 million yuan, +193.57% YoY, +15.43% month-on-month; net profit excluding non-return to mother was 145 million yuan, +377.49% YoY, +3.08% YoY.

Key points of investment:

Overall results were under pressure in 2023, and profitability continued to improve in 23Q4. Due to weak market demand in the automotive, industrial and other industries, the company's sales of its memory chip product line and analog and interconnection chip product line to the industry market were under pressure, causing the company's revenue to decline year-on-year in 2023.

The company's gross margin in 2023 was 37.10%, down 1.46% year on year, net margin was 11.38%, down 3.01% year on year; 23Q4 gross margin was 38.38%, up 1.27% month on month, and net profit was 14.20%, up 2.23% month on month. The company continued to increase R&D investment. In 2023, the company invested 708 million yuan in R&D, an increase of 10.40% over the previous year, and R&D investment accounted for 15.84% of revenue.

Use restricted stock incentive plans to motivate employees and strengthen the company's talent team. The company announced the 2024 restricted stock incentive plan (draft). The total amount of restricted shares to be granted under this incentive plan will not exceed 43234.68 million shares, accounting for 0.90% of the company's total share capital. The total number of incentive recipients for the first time was 351 people, mainly company directors, senior management, middle management and core business (technical) executives, etc., at a grant price of 31.09 yuan/share. The performance assessment target for the first portion of this incentive plan is based on 2023, requiring that the product sales growth rate or net profit growth rate of the integrated circuit design business be no less than 5%/10%/15% in 2024-2026.

Market demand in the industry may gradually pick up, and the memory chip business is expected to resume growth. The company's memory chips are mainly aimed at the automotive, industrial, medical and other industrial markets and high-end consumer markets; in 2023, the company carried out product research and development of high-speed DRAM, mobile DRAM and other memory chips with different capacities and types, including various products from SDR, DDR1, DDR2, LPDDR2, DDR3 to DDR4, LPDDR4, etc. Among them, the company has begun mass production of 8G LPDDR4; in response to the demand trend for DRAM products in niche markets, the company launched next-generation DRAM technology and Product research and development. Next-generation processes can support the company to develop larger DRAM products to meet the demand for higher capacity DRAM products brought about by the continuous development of automotive intelligence. With the gradual elimination of product inventories in all parts of the industrial chain in the industry market, it is expected that industry market demand will gradually pick up in 2024. As a leading memory company in the domestic industry market, the company continues to enrich its memory chip layout and is expected to resume growth amid industry recovery.

The consumer market is expected to enter an upward trend, and computing chips may continue to grow. The company's computing chips include microprocessor chips and smart video chips. In the field of video surveillance, the company's T20, T30, and T40 product lines formed a pattern covering a full range of high- and low-end products. In 2023, products with dual camera and multi-camera functions became more and more popular in the market, and T-series products built a strong first-mover advantage in the dual-camera and multi-camera markets, driving the company's product sales growth in the security market. In 2023, the company's computing chip revenue increased 43.91% year-on-year.

In 2023, demand in some consumer markets picked up, and the trend of inventory removal was good. It is expected that in 2024, more consumer market segments will enter an upward trend, and the company's computing chip business is expected to continue growing.

Profit forecasting and investment advice. The company lays out three product lines of computing chips, memory chips, and analog and interconnected chips. Memory chips and analog and interconnect chips mainly target the industry market. Demand in some consumer markets picked up in 2023, and inventory removal trends are good. It is expected that more consumer market segments will enter an upward trend in 2024. It is expected that industry market demand may gradually pick up in 2024. The company is expected to fully benefit from industry recovery. We expect the company's 24-26 revenue to be 52.97/63.40/7.280 billion yuan, 24-26 The net profit returned to the mother for the year was 702/9.07/1,094 million yuan, the corresponding EPS was 1.46/1.88/2.27 yuan, and the corresponding PE was 43.73/33.88/28.08 times, maintaining the “buy” rating.

Risk warning: Downstream demand recovery falls short of expectations; industry competition intensifies; progress in automotive intelligence falls short of expectations; progress in new product development falls short of expectations.