Incident: On April 25, Hongwei Technology released its 2023 annual report and 2024 quarterly report. In 2023, the company achieved revenue of 1,505 billion yuan, an increase of 62.48% over the previous year, and achieved net profit of 116 million yuan, an increase of 47.63% over the previous year. In a single quarter of 1Q24, the company achieved revenue of 246 million yuan, a year-on-year decrease of 25.59% and a year-on-month decrease of 33.27%; realized net profit to mother of -0.2 billion yuan, a year-on-year decrease of 105.56% and a year-on-year decrease of 105.60%.

Industry sentiment fluctuated, and Q1 results were under pressure. In a single quarter of 1Q24, the company achieved revenue of 246 million yuan, down 25.59% year on year and 33.27% month on month; gross profit margin was 15.88%, down 8.71 pct month on month; realized net profit to mother - 0.2 billion yuan, down 105.56% year on year, down 105.6% month on month. The company's revenue and gross margin are under pressure due to fluctuations in industry sentiment, and the company continues to invest in high R&D expenses, causing profits to turn into losses.

Photovoltaics and vehicle regulations continue to break through, and products continue to be released. In terms of photovoltaics, revenue increased 106.15% year-on-year in 2023. The 12-inch 1200VM7i chip has been developed and verified, and production is being gradually increased in cooperation with major customers; 400A/650V three-level customized modules have been developed smoothly and batch delivery has begun. Currently, production capacity is stable and terminal performance is good. In terms of new energy vehicles, revenue increased 149.65% year over year. The successfully developed 750VM7iIGBT chip and the supporting free-flow FRD chip have completed vehicle certification and begun large-scale delivery; the 400-800A/750V double-sided cooling module development has passed relevant vehicle-level performance, reliability and system-level tests, and passed client certification, and entered the mass production stage, which will continue to drive sales growth of power modules for NEV main drive inverter applications in 2024.

R&D investment continues to increase to promote product iteration, and fund-raising projects help expand production capacity. In 2023, the company's R&D investment increased by 68.17% year on year, adding more than 120 products. The company continues to innovate around core technologies such as ultra-fine groove structure+field blocking technology and soft recovery diode chip technology for reflow. The products fully cover the needs of new energy vehicles, new energy power generation, energy storage and industrial control, and continue to innovate around many key technologies of seventh-generation power chips, such as micro-groove IGBT technology, virtual cell technology, and reverse conduction IGBT technology. At the same time, the company has established in-depth cooperative relationships with many domestic research institutes and overseas institutions to actively lay out next-generation compound semiconductor chips and packaging technology.

At the same time, the company is seizing opportunities for localization alternatives and actively promoting the construction of fund-raising projects. The “New Power Semiconductor Device Industrial Base Project” and the “R&D Center Construction Project” have completed the promised investment, and the projects have all been implemented and are ready for use. In July 2023, the company issued convertible bonds for the company's “Vehicle Grade Power Semiconductor Discrete Device Production and Development Project (Phase 1)”. After completion, the project will form a production capacity of 2.4 million pieces of automotive-grade power semiconductor discrete devices per year to help the company deepen its main business development and strengthen its competitive advantage in the market.

Investment advice: Currently, the company's chip self-development ratio is gradually increasing, and the downstream customer and revenue structure are constantly being optimized.

We expect the company's net profit to be 0.69/131/186 million yuan in 2024-2026. The current market value corresponds to PE of 55/29/20 times, maintaining the “recommended” rating.

Risk warning: risk of production capacity release falling short of expectations; risk of revenue growth of new products falling short of expectations; risk of changes in industry sentiment.