Description of the event

The company released its report for the first quarter of 2024. In the first quarter of 2024, the company achieved operating income of 1,007 billion yuan, a year-on-year decrease of 5.80%; realized net profit of 87 million yuan, a year-on-year decrease of 23.90%; and realized net profit of 82 million yuan after deduction, a year-on-year decrease of 26.05%.

Incident reviews

Affected by sluggish demand in the industry, the company's performance is under pressure in the short term. Market demand in the 2024Q1 industrial, medical and other industries continued to be sluggish in 2023. In addition, inventory pressure in the industrial chain affected customer procurement needs. The company's memory chip revenue for the industry market fell 12.96% year on year to 640 million yuan; benefiting from the recovery in demand from office equipment, white goods, and some consumer markets and the increase in demand from domestic automotive customers, 2024Q1's analog and connected chip revenue increased 16.90% to 110 million yuan year on year, and computing chips for the consumer market increased 13.31% year on year to 240 million yuan . Since memory chip products account for more than 60% of total revenue, they are being dragged down by memory chip revenue, and the company's performance is under pressure in the short term.

Profitability declined sequentially in the first quarter, and the company continued to strengthen technology research and development. 2024Q1's gross margin was 37.45%, up 0.37 pct year on year, down 0.93 pct month on month, the company's net margin was 8.66%, down 1.68 pcts year on year, down 5.54 pcts month on month. The main reason for the month-on-month decline in profitability in the first quarter was the low season, and the third and fourth quarter was the peak season, so the product portfolio and unit price performance in the first quarter will be slightly worse than in the fourth quarter of last year. The company attaches great importance to R&D and continues to develop core technologies and new products in various product lines. 2024Q1's R&D expenses increased 9.76% year-on-year to 180 million yuan.

The industry has recovered and the product layout has been enriched, and the company's performance can be expected to grow. Some consumer markets targeted by computing chips in 2023 have shown signs of recovery, and market inventory pressure has begun to decline. The company continues to carry out product layout and market expansion in the fields of security monitoring and pan-video. While consolidating the stock market, it accurately explores new market needs and grasps the long-term development space of the smart IOT market. Compared with the consumer market, the stability of the industry market is relatively high. In 24, with the gradual elimination of product inventories in all parts of the industrial chain in the industry market and the gradual recovery of the global economy, it is expected that industry market demand will gradually pick up in 24 years. The company has a rich range of memory chips and analog interconnect chip products, which can fully meet the diverse product needs of the industry market and ensure that the company fully grasps market development opportunities after the industry market recovers. At the same time, the company is actively developing and promoting new products. The company began DRAM 21nm research and development in 2023. There is an opportunity to launch larger DRAM products in the future. The cost performance ratio of DDR4 and LPDDR4 products will also improve, helping the company's products be applied in more scenarios and achieve new growth in performance.

Investment advice

As a leader in automotive-level storage, the company's “computing+storage+simulation” product matrix continues to improve. As the industry market situation gradually recovers, the company's performance is expected to grow. The company's net profit for 2024-2026 is expected to be 6.07/8.32/1,148 billion yuan, an increase of 12.9%/37.2%/37.9% over the previous year, corresponding EPS of 1.26/1.73/2.38 yuan, and PE 49.9/36.4/26.4 times. For the first time, coverage was given a “holdings increase-A” rating.

Risk warning

Expected risk of insufficient demand in the downstream market: The company's chip products cover various fields such as automobiles, industry, medical care, communications, and consumption. Market demand characteristics in different fields vary. For example, demand in key markets falls short of expectations, which may pose a risk to the company's revenue, thereby adversely affecting the company's development.

Inventory risk: As the company's revenue scale continues to grow, in order to meet market sales needs, the company's inventory size may also increase accordingly. At the same time, strong demand in the integrated circuit market in 2021 led to a shortage of supply chain production capacity and extended production cycles. In order to meet customer needs, the company increased production and preparation, leading to a large overall inventory size in the past two years. If there are unpredictable changes in market demand in the future, the company may experience a certain inventory risk.

Risk of declining gross margin: In the past two years, due to large changes in demand and supply chain conditions in the electronics market, the consumer market and industry market have successively entered a downward cycle. Changes in market supply and demand have led to a decline in gross margin for some products. Given that there is still some uncertainty about changes in market demand, and at the same time, market competition continues to intensify, there is still a risk that product gross margin will decline in the future.

Product development risks: Rapid technology updates and intense market competition in the integrated circuit industry require companies to continuously launch new products. At the same time, the integrated circuit production process continues to develop, the capital investment required for new process products continues to increase, and the difficulty of product development is also increasing. If the products developed by the company do not meet market needs well, it may adversely affect the company's market sales and increase business risks.