Introduction to this report:

Both storage and MCU are at the bottom of the cycle. Nor utilization is gradually being fully produced, SLC Nand and niche DRAM prices are rising moderately, and the company is benefiting from capacity expansion and new product iteration, speeding up the domestic replacement process, and is expected to increase its performance.

Key points of investment:

Maintaining the “Overweight” rating, the target price was lowered to 95.36 yuan. Demand was sluggish in '23, and inventory was being removed. Inventory calculation was large, and overall prosperity was at the bottom. Therefore, EPS for 24-25 was reduced to 1.49/2.28, and EPS for 26 years was added to 3.24 yuan (the original 24-25 EPS was 2.71/3.73 yuan). The company's storage and MCU are at the bottom of the cycle. Nor's operating rate is gradually reaching full capacity, and SLC Nand and niche DRAM prices have risen moderately, benefiting from capacity expansion and new product iteration to accelerate the domestic substitution process. Considering that the storage industry's average valuation is 54 times PE, a certain valuation premium was given, 64 times PE in 2024, and the target price was lowered to 95.36 yuan.

Market demand picked up, and the 24Q1 performance showed a high year-on-month increase, exceeding expectations. 2024Q1 achieved revenue of 1,627 billion yuan, YOY +21.32%; net profit to mother of 205 million yuan, YOY +36.45%; achieved gross profit margin of 38.16%, and achieved a gross profit margin of 38.16%, an increase of 3.66 pcts. The company's good performance is mainly due to: ① demand was sluggish in '23, and personal consumer electronics such as mobile phones picked up in 24Q1; ② product iteration, the competitiveness of each product line gradually increased, and the market share increased.

At the bottom of the cycle, large manufacturers transferred production capacity and consumer demand picked up, and the trend of large price increases spilled over to niche chips. From niche DRAM to SLC NAND to Nor, prices are expected to rise moderately in sequence, and the deep benefit cycle recovers. The company has an in-depth layout in the niche DRAM business, benefiting from domestic replacement. The amount of related transactions between the company and Changxin's own product foundry in '24 was 852 million yuan. Currently, it is divided into 2 product lines, 4Gb for D4 and 2/4Gb for D3L, respectively. It is expected that new products, including D4 8Gb, will be launched later.

Catalysts: Q2 price increases fell short of expectations; demand fell short of expectations.

Risk warning: The company's product iteration falls short of expectations; the competitive landscape of the industry deteriorates.