Incident Overview

In 2023, the company achieved revenue of 1,433 billion yuan, an increase of 12.74% over the previous year; achieved net profit of 136 million yuan, an increase of 39.95% over the previous year; and realized net profit without deduction of 109 million yuan, an increase of 63.55% over the previous year.

2024Q1 achieved revenue of 387 million yuan, an increase of 21.71% year on year; realized net profit of 54 million yuan, up 73.43% year on year; realized net profit of 48 million yuan after deducting net income from mother, an increase of 88.56% year on year; and net profit after excluding share payments was 60 million yuan.

2024Q1 Revenue grew steadily, and net profit exceeded expectations

1) In terms of revenue, in 2023, the company achieved revenue of 1,433 billion yuan, a year-on-year increase of 12.74%; 2024Q1 achieved revenue of 387 million yuan, an increase of 21.71% over the previous year. Compared with 2023Q1, both new and old customer businesses contributed to growth. The new cost-effective product lines ESP32-C3 and ESP32-C2 and the high-performance product line ESP32-S3 are all in a stage of rapid growth; the expanded product matrix can meet a wider range of customer application needs, and ultimately achieved overall revenue growth . By business, the 2024Q1 chip business accounted for 42.7% of revenue, an increase of 8.5 pct over the previous year; the module business accounted for 56.7% of revenue, a year-on-year decrease of 7.9 pcts.

2) In terms of profit, in 2023, the company achieved net profit of 136 million yuan, an increase of 39.95% over the previous year; 2024Q1 achieved net profit of 54 million yuan, an increase of 73.43% over the previous year. One was an increase in operating income, the second was a stable gross margin, and third, the growth rate of expenses was controlled by the growth rate of operating income.

3) In terms of gross margin, the company's gross margin in 2023 was 40.56%, up 0.58 pct year on year; the gross margin of 2024Q1 was 41.9%, up 1.2 pct year on year. The main structural changes were due to an increase in the share of chips, and the overall situation remained stable. By business, the gross margin of the 2024Q1 chip was 47.1%, down 1.26pct from the previous year. The main reason was that chip customers mainly used RMB pricing, while the cost was mainly in US dollars. The appreciation of the US dollar put pressure on the chip gross margin; the gross margin of the module was 38.06%, an increase of 1.32 pct over the previous year.

4) In terms of cost ratio, 2024Q1's sales expense ratio was 3.3%, down 0.5 pct year on year. The main reason was that the company's product line revenue based on the RISC-V open source instruction set entered a stage of rapid growth, and related products saved MCU royalty expenses, so the correlation between sales expenses growth rate and revenue growth rate decreased and was lower than the revenue growth rate; the management expenses rate was 3.8%, down 0.6 pct year on year; R&D expenses rate was 26.8%, which is basically the same as 2023Q1.

5) In terms of cash flow, the net cash flow from 2024Q1's operating activities was -12 million yuan, compared to 33 million yuan in the same period last year.

6) In terms of inventory, 2024Q1's inventory increased by 41.12 million yuan compared to the end of 2023, an increase of 16.97% over the previous year. The company's inventory balance at the end of 2023 was 240 million yuan.

The product matrix continues to expand to meet a wider range of customer application needs. The company closely monitors future technological needs and market trends. As the pace of the company releases new products accelerates, the company's product matrix is further enriched. Currently, the company's chips can be divided into two categories: high performance and cost performance. Customers can choose the appropriate category according to specific application scenarios and their own needs. 1) The cost-effective product line will grow more significantly in 2023. This is mainly due to the fact that the original main product category was only a single Wi-Fi MCU ESP8266 (sold for 10 years), but now the Wi-Fi+BLECOMBO ESP32-C3 and ESP32-C2 series are being rapidly accepted by the market, thus becoming the main driver of growth. 2) In terms of high-performance product lines, the old product ESP32 has continued to be sold for 8 years. Some customers have cost reduction requirements. The ESP32-C3 business has successfully taken over. Incremental sales mainly come from the new ESP32-S3 series, and the ESP32-S series, starting with the ESP32-S3 chip, will enhance AI applications. The ESP32-S3 chip adds vector instructions (vector instructions) to speed up tasks such as neural network computation and signal processing.

Continuous R&D investment, software and hardware collaborative development

In 2023, the company invested 404 million yuan in R&D, an increase of 19.75% over the previous year. The number of R&D personnel at the end of 2023 was 484, up 10.00% year over year. 2024Q1 invested 104 million yuan in R&D expenses, an increase of 21.48% over the previous year. The number of R&D personnel at the end of 2024Q1 was about 490, an increase of 8.71% over the previous year. The company's R&D strategy is to maintain self-research on core technology and invest heavily in underlying technology research and development. In addition to chip hardware, the company is also continuously developing and improving software and launching value-added services for IoT software, such as the one-stop AIoT cloud platform ESP RainMaker and Matter solutions; around the core of AIoT, it covers tool chains, compilers, operating systems, application frameworks, AI algorithms, cloud products, apps, etc., to achieve a closed loop of integrated software and hardware solutions in the AIoT field.

Investment advice

We expect the company to achieve revenue of 17.9/23.1/29.0 billion in 2024-2026 (previous value of 19.0/24.3 billion in 2024/2025, respectively), up 25%/29%/26% year on year (26%/28% in previous value 2024/2025, respectively); achieve net profit of 1.9/2.7/3.6 (previous value of 1.6/2.1 billion in 2024/2025, respectively), up 38%/41%/35% year on year (previous value 2024/2025, respectively) %/ 31%), maintaining a “buy” rating.