Matters:

In 2023, the company achieved total revenue of 506 million yuan, a year-on-year decrease of 31.54%; net profit to mother - 329 million yuan, a year-on-year decrease of 736.57%; deducted non-net profit - 442 million yuan, a year-on-year decrease of 285 million yuan. In Q1 2024, revenue was 120 million yuan, up 1.62% year on year; net profit to mother was -75 million yuan, a year-on-year decrease of 0.3 billion yuan.

Commentary:

Short-term performance is under pressure, and R&D investment continues to be increased. Revenue side: In 2023, the company achieved total operating revenue of 506 million yuan, a year-on-year decrease of 31.54%; net profit to mother of -329 million yuan, a year-on-year decrease of 736.57%; deducted non-net profit of 442 million yuan, a year-on-year decrease of 285 million yuan; and the gross profit margin of the main business was 36.04%, a year-on-year decrease of 11.14pp. In Q4 2023, the company achieved revenue of 111 million yuan, a year-on-year decrease of 56.30%; net profit to mother - 123 million yuan, a year-on-year decrease of 101 million yuan. In Q1 2024, revenue was 120 million yuan, up 1.62% year on year; net profit to mother was -75 million yuan, a year-on-year decrease of 0.3 billion yuan. Cost side: In 2023, the company continued to invest in R&D and actively expand the market, compounding the impact of intellectual property litigation and arbitration, which led to an increase in cost rates during the period. The sales, management, and R&D expenses rates were 20.97% (+8.82pp), 25.15% (+11.40pp), and 83.96% (+41.60pp), respectively.

The industry is in a period of adjustment, which has had a negative impact on product revenue. In 2023, due to the temporary stagnation of procurement due to internal management issues of some important customers in traditional dominant industrial control fields, industrial control chip revenue was 162 million yuan, down 41.21% year on year; gross profit margin was 67.49%, down 8.42pp year on year. Affected by the decline in procurement volume due to the e-government market being in an adjustment period, the revenue of information technology chips was 92 million yuan, a decrease of 51.23% year on year; due to the decline in sales volume, the fixed cost share for a single product increased, and the gross profit ratio was 5.30%, a decrease of 16.10pp year on year. Solution revenue was 251 million yuan, down 8.13% year on year; gross profit margin was 26.95%, down 8.95pp year on year.

Seize the new round of commercial transformation and move towards an open market. 2022 to 2024 is an important transition period for the company from a policy market to an open market. It will adhere to the “two-legged” approach of policy markets and open markets, and implement the “point-and-point integration” business policy and the “platform-based, quality first, in-depth development, and key breakthroughs” work policy. Quickly improve the cost performance ratio of Dragon Core general purpose CPUs, improve the software ecosystem, and fully complete the development of the “Three Musketeers” of general-purpose CPUs such as 3A6000+7A2000, 3C6000, and 2K3000. In addition, in line with specific application requirements, special system solutions with open market cost performance advantages and embedded/dedicated CPU chips with open market competitiveness are developed based on Longxin General CPUs.

Investment advice: Considering macroeconomic changes and the company's main business being greatly affected by the industry adjustment period, we adjust the company's profit. The 2024-2026 revenue is expected to be 7.14, 10.02, and 1,384 billion yuan (the value before 2024 and 2025 was 16.57 billion yuan and 2.48 billion yuan), an increase of 41.1%, 40.3%, and 38.2% year-on-year; net profit due to mother for 2024-2026 is -0.96, 0.02, and 81 million yuan (the value before 2024 and 2025 was 3.18 billion yuan, 500 million yuan), up 71%, 102.3%, and 3571.9% year-on-year, maintaining a “strong” rating.

Risk warning: Market development falls short of expectations; market competition intensifies; customer concentration is high.