Matters:

On April 14, 2024, the company released its 2023 Annual Report:

1) 2023: Operating income of 7.244 billion yuan, -27.93%; gross profit margin of 21.61%, -24.55pct year on year; net profit to mother/net profit after deduction of 212/047 million yuan, -93.05%/-98.36% YoY;

2) 2023Q4: Operating revenue of 2,227 billion yuan, +42.87%/+8.77% YoY; gross profit margin of 28.35%, +15.40pct/month-on-month +9.15pct; net profit to mother 180 million yuan, reversal of losses year over year, +137.62% month-on-month, net profit of 172 million yuan, +697.07% month-on-month.

Commentary:

The company's quarterly performance continued to improve, and the increase in operating rate led to a significant recovery in profitability. The company's operations improved quarterly, and quarterly revenue continued to grow month-on-month. 2023Q1-Q4 revenue was 10.90/18.80/20.47/2,227 billion yuan respectively. Since the second quarter, the quarterly revenue growth rates were 72.50%/8.90%/8.77%, respectively, and the gross margin for the 2023 quarter was 8.02%/24.13%/19.20%/28.35%, respectively. In terms of application products, the company's main products such as DDIC, CIS, PMIC, and MCU accounted for 84.79%, 6.03%, 6.04%, and 1.71% of the main business revenue in 2023. As a global LCD panel driver chip foundry leader, the company significantly benefited from panel industry chain transfer opportunities, while other process platforms such as CIS, MCU, and PMIC continued to expand.

As new processes and new process platforms continue to break through, the company's OEM share is expected to increase further.

The industry cycle continues to recover, and the company is expected to usher in a continued release of performance flexibility. The company's foundry is a typical asset-heavy industry. In the context of a downturn cycle, depreciation and labor costs will seriously erode the company's profitability. Currently, the DDIC industry continues to recover, and inventory removal from other product platforms such as CIS, MCU, and PMIC is gradually being completed. The company's capacity utilization rate continues to increase, and revenue is growing quarter by quarter. The company's performance is expected to continue to grow as subsequent demand from the industry continues to pick up and add revenue from the company's newly built production capacity.

The company continues to make breakthroughs in high-end manufacturing processes, and multiple processes+multiple platforms drive future performance growth. The company continues to strengthen its technical capabilities and achieve mass production of 55nm CIS and 55nm TDDI products. The 110nm DDIC for vehicles has passed the company's customers' 12.8-inch display assembly reliability tests to accelerate the expansion of the company's products into the automotive market. The 40nm OLED driver chip has been successfully developed and officially released. Looking at the process node, the company's 55nm, 90nm, 110nm, and 150nm accounted for 7.85%, 48.31%, 30.47%, and 13.38% of the company's main business revenue in 2023. 55nm's share of main business revenue increased by 7.46 pcts compared to 2022. The company's multi-process+multi-platform layout is expected to drive future performance growth.

Investment advice: The bottom of the industry cycle has passed. The panel industry chain is clearly shifting to mainland China. The expansion of the company's new process and new process platform is expected to open up room for growth. Considering the slow recovery in terminal demand, we lowered the company's net profit forecast for 2024-2025 from 1,000/1,768 billion yuan to 800/1200 million yuan, corresponding EPS of 0.40/0.60 yuan, and an additional 2026 net profit forecast of 1,628 billion yuan, corresponding EPS of 0.81 yuan. Considering that the profitability of foundry companies fluctuates greatly, we adopted the PB valuation method, referring to industry comparable company valuations, and gave the company 1.6 times PB in 2024, corresponding to a target price of 17.7 yuan, to maintain a “strong push” rating.

Risk warning: the recovery of the industry boom falls short of expectations; competition in the industry intensifies; the company's process development falls short of expectations.