Matters:

On April 29, 2024, the company released its report for the first quarter of 2024:

In 2024Q1, the company achieved operating income of 2,228 billion yuan, +104.44%/+0.06% year over year; gross profit margin of 24.99%, year-on-month +16.96pct/-3.36pct; net profit to mother of 79 million yuan, reversing loss year on year, -55.88% month on month; net profit after deducting net profit of 57 million yuan, year-on-year loss, -66.64% month-on-month.

Commentary:

The company's quarterly performance continued to improve, and the increase in operating rate led to a significant recovery in profitability. The company continues to optimize its product structure, strengthen its technical strength, and improve product market competitiveness. At the same time, the semiconductor industry's prosperity has picked up, and overall market demand has picked up. 2024Q1 revenue +104.44% YoY to 2,228 billion yuan, gross margin +16.96pct YoY to 24.99%, net profit margin +33.89pct to 3.56% yoy, and the company's profitability has recovered significantly. As a global leader in LCD panel driver chip foundry, the company has significantly benefited from panel industry chain transfer opportunities, while other process platforms such as CIS, MCU, and PMIC continue to expand. As new processes and new process platforms continue to break through, the company's OEM share is expected to increase further.

The industry cycle continues to recover, and the company is expected to usher in a continued release of performance flexibility. The company's foundry is a typical asset-heavy industry. In the context of a downturn cycle, depreciation and labor costs will seriously erode the company's profitability. Currently, the DDIC industry continues to recover, and inventory removal from other product platforms such as CIS, MCU, and PMIC is gradually being completed. The company's capacity utilization rate continues to increase, and revenue is growing quarter by quarter. The company's performance is expected to continue to grow as subsequent demand from the industry continues to pick up and add revenue from the company's newly built production capacity.

The company continues to break through in high-end manufacturing processes, and multiple processes+multiple platforms drive future performance growth. The company continues to strengthen its technical capabilities, and the 55nm single-chip, high-pixel back-illuminated image sensor (BSI) ushered in mass production; the self-developed 40nm high-voltage OLED display driver chip successfully illuminated the panel for the first time, and is expected to achieve small-batch mass production in the second quarter of 2024. The company's DDIC and CIS accounted for 71.82% and 13.27% of the main business revenue respectively. CIS has become the company's second largest product spindle. Looking at the process node, 55nm, 90nm, 110nm, and 150nm accounted for 7.85%, 48.31%, 30.47%, and 13.38% of the company's main business revenue in 2023, and 55nm accounted for 10.23% of the main business revenue in the first quarter of 2024. The company's multi-process+multi-platform layout is expected to drive future performance growth.

Investment advice: The bottom of the industry cycle has passed. The panel industry chain is clearly shifting to mainland China. The expansion of the company's new process and new process platform is expected to open up room for growth. We maintain the company's 2024-2026 net profit forecast of 800/12.00/1,628 million yuan, corresponding EPS of 0.40/0.60/0.81 yuan. Considering that the profitability of foundry companies fluctuates greatly, we adopted the PB valuation method, referring to industry comparable company valuations, and gave the company 1.75 times PB in 2024, corresponding to a target price of 19.4 yuan, to maintain a “strong push” rating.

Risk warning: the recovery of the industry boom falls short of expectations; competition in the industry intensifies; the company's process development falls short of expectations.