Results for 2023 and 1Q24 fell short of our expectations
The company announced its 2023 results: revenue of 61,213 billion yuan, up 5.4% year on year; net profit to mother of 1,181 billion yuan, down 19.08% year on year; net profit after deducting non-return to mother was 1,127 billion yuan, down 26.89% year on year. The 2023 results fell short of our expectations, mainly due to gross margin falling short of expectations, increased asset impairment and disposal losses (the discontinuation of the optical module business of specific customers calculated asset impairment reserves of $543 million and other related impacts of $190 million). The company paid a cash dividend of 0.125 yuan/share (tax included) in 2023.
At the same time, 1Q24 results were announced: revenue of 16.247 billion yuan, up 12.62% year on year; net profit to mother was 143 million yuan, down 68.82% year on year; loss after deducting non-net profit of 86.59 million yuan (1Q23 minus non-net profit was 392 million yuan). The company's 1Q24 performance fell short of our expectations, mainly due to lower gross margin than expected.
Development trends
Semiconductors: Demand for terminals is weak, profitability is under pressure, and R&D investment continues to be high for a long time. 1) Revenue side: Semiconductor business revenue of 15.226 billion yuan in 2023, down 4.85% year on year, mainly due to a phased slowdown in the growth rate of downstream automobile demand; 2) Profit side: net profit of semiconductor business in 2023 was 2,426 billion yuan, down 35.29% year on year. We judge that the gross margin of the semiconductor business fell 4.07ppt to 38.59% year on year due to weak terminal demand. In 2023, the semiconductor business invested 1,634 billion yuan in R&D, an increase of 37.2% over the previous year. The company continued to invest heavily in R&D to deploy new technologies and products.
Product integration: One-off expenses drag down profits, and operating profits turn losses into profits. 1) Revenue side: Product integration business revenue in 2023 was 44.315 billion yuan, up 11.99% year on year. Against the backdrop of weak consumer electronics demand, the company continued to explore overseas markets and achieved revenue growth against the trend; 2) Profit side: net profit loss of 447 million yuan from the product integration business in 2023. After deducting the impact of goodwill impairment of 494 million yuan, the product integration business achieved profit in 2023 (net loss of 770 million yuan in 2022).
Revenue rose steadily in 1Q24, and rising raw material prices and weak terminal demand affected gross profit margins. 1Q24's revenue increased 12.62% year over year, mainly due to the increase in new products from specific customers, 1Q24 product integration business revenue increased 20.71% year on year; gross margin decreased 8.74ppt to 9.2% year on year, mainly due to raw material price increases affecting product integration business gross margin falling 6.42ppt to 3% year on year, and weak terminal demand affected the semiconductor business gross margin falling 10.66ppt to 31% year on year. Looking forward to the future, we are optimistic that the company's profits will gradually improve as consumer electronics enters the peak season and orders from specific major customers gradually contribute to profits.
Profit forecasting and valuation
The net profit forecast for 2024 was lowered by 63.8% to 1.5 billion yuan, and a new net profit forecast of 2.4 billion yuan was introduced, taking into account the slowdown in downstream automobile demand growth and the increase in raw material prices. The current stock price corresponds to 2024/2025 26.2/16.4 times P/E. Maintaining an outperforming industry rating, we are optimistic that the company's leading position will be stable. The target price will be lowered by 32.6% to 38.5 yuan, corresponding to 31.9/20.0 times P/E in 2024/2025, with 22% room for growth.
risks
Downstream demand falls short of expectations; major customer expansion falls short of expectations; risk of impairment of goodwill.