Shannon Xinchuang released its 2023 annual report and first quarter report. In 2023, the company achieved revenue of 11.27 billion yuan, yoy -18.2%, net profit to mother of 378 million yuan, yoy +20.4%, net profit after deducting non-return to mother of 305 million yuan, yoy +19.05%, comprehensive gross profit margin of 5.80% for the whole year, +1.38% year-on-year, and a net profit margin of 3.35% and +1.07% year over year. The company achieved revenue of 3.63 billion yuan, yoy +20.9%, qoq +10.0%, net profit to mother of 160 million yuan, yoy +1.6%, qoq +299.9%, net profit of 170 million yuan after deducting non-return to mother net profit of 170 million yuan, yoy +72.3%, and qoq +166.8% in a single quarter. Single quarter comprehensive gross profit margin 8.3%, yoy +0.1%, qoq +3.6%, net profit margin 4.4%, yoy -0.8%, qoq +3.2%.

Revenue and operating performance improved significantly as industry inventory was removed and demand recovered. 2024Q1, benefiting from the increase in demand for memory chips from downstream customers, achieved revenue of 2.03 billion yuan, a year-on-year increase of 46.86%, and deducted non-net profit of 54.4794 million yuan, yoy +193.45%. The consolidated gross profit margin for the single quarter was 5.3%, the net profit margin was 0.61%, after deducting the non-net profit margin of 2.37%. Due to large fluctuations in the securities market in the first quarter of 2024, the fair value of shares held by the company and its subsidiaries decreased (Shannon Xinchuang held equity investments before the IPOs of Ningbo Silicon Electronics and Microconductor Nano, and there were no new investments since the company first acquired its shares), and net profit attributable to shareholders of listed companies was 14.0982 million yuan, a year-on-year decrease of 83.49%.

The price of storage products continues to rise. In terms of spot prices, DRAM prices continued to rise. Taking DDR516G (2Gx8) 4800/5600 products as an example, the average spot price was 4.79 US dollars on April 19, up 23.5% from the low in August 23. We expect DDR5 products are expected to see a sharp rise in volume and price with the demand for high-performance computing in fields such as AI. Looking at contract prices, TrendForce expects the 24Q2 NAND Flash contract price to rise sharply by 13%-18%, with enterprise-grade SSDs increasing the most, reaching 20-25%. DRAMQ2 contract prices are expected to increase by 3-8% quarterly. Combined with Samsung's recent increase in enterprise-grade SSDs, the 24Q1 niche storage price inflection point has arrived, and we continue to be strongly bullish on the storage sector.

The market space for enterprise-grade SSDs is vast, and Hype Storage is driving the domestic replacement process. In May 2023, Shannon Xinchuang issued an announcement. The company and Shenzhen Dapuwei and other companies jointly established Haipu Storage, of which Shannon Xinchuang holds 35% of the shares. Haip Storage focuses on the R&D, production and sales of enterprise-grade storage products. The products cover enterprise-grade NVMe SSDs and RDIMMs, and aim to provide high-performance, high-reliability storage solutions for servers and data centers. The company has established R&D and production bases in Shenzhen and Wuxi, and has launched enterprise-grade PCIe 4.0 NVMe SSD and RDIMM products based on domestic master control chips. By integrating upstream chips and downstream customer resources, the company will accelerate the promotion of domestic replacement of enterprise-level storage.

The global HBM market is expected to reach 9.1 billion US dollars in 2024, and the original factory is expanding production at an accelerated pace. Taking into account the global CoWoS production capacity (TSMC's CoWoS is estimated to produce about 252 thousand chips in 2024), customer share, number of chips produced in a single wafer, and HBM specifications equipped with different AI accelerators, we expect global demand for HBM to be around 40 million in 2024, and the market size will reach 9.14 billion US dollars. In terms of production capacity, TrendForce estimates that Samsung's HBM production capacity is expected to reach about 130K/month (including TSV) by the end of 2024, more than 2.5 times that of 2023, and is expected to double in 2025; SK Hynix's HBM production capacity is expected to more than double year-on-year to 120K/month by the end of 2024. It is estimated that by the end of 2024, the total production capacity of the three major original manufacturers of HBM (including TSV) will exceed 270K/month.

We expect Shannon Xinchuang to achieve revenue of 172/225/29.4 billion yuan and net profit of 5.9/8.5/1.2 billion yuan in 2024-2026, respectively, maintaining the “Highly Recommended” rating.

Risk warning: Risk of gross margin fluctuation due to price fluctuations of IC products such as memory, risk of supplier dependency, risk of international trade disputes.