1Q24: Downstream demand slowly recovers, inventory levels begin to drop

The company achieved revenue of 701 million yuan (yoy: -32.75%) and net profit to mother of 197 million yuan in '23, changing from profit to loss year-on-year. 1Q24 achieved revenue of 142 million yuan (yoy: -24.29%, qoq: +31.46%) and net profit to mother of 55.66 million yuan (1Q23: -51.01 million yuan, 4Q23: -5936 million yuan). Since 23, procurement demand has been sluggish due to FPGA terminal inventory removal, and the revenue side experienced a sharp year-on-year decline.

Demand in the 1Q24 market slowly recovered, but shipments still declined year-on-year. Furthermore, due to pressure on gross margins and high R&D investment, the company continued to lose profits in a single quarter. We believe that the inventory digestion of communications/industrial control customers may continue until the middle of the year. The revenue for 24/25/26 is estimated to be 9.79/13.56/1,897 million yuan. Considering the company as a scarce domestic FPGA supplier, it will still take time for communication/industrial control demand to recover. 14x 24PS (comparable to the company's 13x 24PS), with a target price of 34.2 yuan, a “buy” rating.

2023/1Q24 review: Communications/industrial control customers removed inventory, consumer market prices were under pressure, and the company's revenue fell 33% year on year. The main reason was that downstream markets, such as industrial control and communications, which accounted for a relatively large share of revenue, were in the inventory removal cycle, and price competition in some markets was intense, leading to a 1.45 pct year-on-year decrease of 1.45 pct to 38.4% year on year. By product, FPGA and FPSoC revenue in '23 were 6.21/045 million yuan (yoy: -37.24%/+13.65%), and gross margins fell 2.41/32.58pct to 36.72%/14.94%, respectively. The share of revenue for the high-end series PHOENIX in FPGA products increased further, so the gross margin of the FPGA product line was relatively stable. However, since FPSoC is mainly aimed at the consumer market, price competition is fierce, resulting in a sharp year-on-year decline in gross margin. The 1Q24 gross profit margin was 38.53% (yoy: +1.21pct, qoq: -11.15pct). The sharp month-on-month decline was mainly due to 4Q23's relatively high technical service revenue share (98% gross profit margin in 23), which has actually improved compared to 3Q23 (35.86%).

In terms of inventory, as of the end of 1Q24, the company's inventory was 699 million yuan, down 64 million yuan from the end of 23, but the number of inventory turnover days is still high (754 days), and it is expected to decline further in the coming quarter.

24-year outlook: Demand is gradually picking up, 2H24 is expected to usher in an inflection point. 1Q24 revenue has begun to improve month-on-month. It is expected that in the second half of '24, with downstream customer inventory digestion coming to an end and the company's PHOENIX series of new products to be released, revenue is expected to usher in an inflection point: 1) The introduction of new Phoenix series products is expected to accelerate. PHOENIX1 high-capacity and medium-logic capacity products are expected to achieve mass production and shipment; 2) Next generation The SALDRAGON series of FPSoC products supports low power consumption and high performance applications, and is expected to start expanding in 24 years; 3) Continuously expand customers in the fields of industrial control, communications, medical care, and new energy.

Investment advice: “buy” rating, target price 34.2 yuan

We expect revenue for 24/25/26 to be 9.79/13.56/1.897 billion yuan. Considering the company as a scarce domestic FPGA supplier, it will still take time for communication/industrial control demand to recover. We will give 14x 24PS (comparable company 13x 24PS), a “buy” rating.

Risk warning: Market competition intensifies, production capacity release falls short of expectations, R&D progress falls short of expectations.