2023 was affected by the industry cycle, putting short-term pressure on performance. The company's revenue in 2023 was 506 million yuan (YoY -31.54%). The decline in revenue was mainly affected by the macroeconomic environment, changes in the industry cycle, a decrease in procurement volume due to an adjustment period in the information technology e-government market, and a temporary stagnation in procurement due to internal management issues of some important customers in the traditional dominant industrial control field; net profit to mother - 329 million yuan (YoY -736.57%), net profit not attributable to mother - 442 million yuan (year-on-year loss of 285 million yuan); gross profit margin 36.06% (YoY-11.03pct). The decline in gross margin is mainly due to an increase in the amount of fixed cost per product due to the decline in sales of information technology chips, while the price of some products is under pressure due to the expansion of market share.

Revenue from industrial control and information technology chips has declined markedly due to factors such as the policy market. The company's 2023 industrial control chip revenue was 162 million yuan (YoY -41.21%), accounting for 32.0%, gross profit margin 67.49% (YoY -8.42pct); information-based chip revenue of 92 million yuan (YoY -51.23%), accounting for 18.1%, gross profit margin 5.30% (YoY -16.10pct); solution business revenue of 251 million yuan (YoY -8.13%), accounting for 49.7%, gross profit margin 26.95% (YoY -8.95pct).

The company is a leading domestic processor company, and the performance of Dragon Core CPUs is close to the mainstream level in the market. Established in 2008, the company is a processor and solution provider mainly engaged in the development, sales and service of processors and supporting chips. Its main products include processor chips such as Dragon Core 1, Dragon Core 2, and Dragon Core 3. Among them, the performance of the Longchip desktop processor 3A5000 and server processor 3C5000 is already at a high level in China, and some desktop terminals, workstations, servers and other complete machine products have gradually been equipped with Longchip CPU chips.

Launch an autonomous command system to master the core technology of CPU IP core design. The company launched an autonomous command system, LoongArch, independently of the Wintel system and the AA system, and developed two basic operating systems: Loongnix for desktop and server applications and LoongOS for terminal and control applications. The company insists on independently developing core IP and mastering the core technology of processor core and related IP core design. Currently, it has formed hundreds of IP cores, including serial CPU IP cores, GPU IP cores, memory controllers, and PHY.

The new-generation Dragon Core 3A6000 processor represents an important milestone in the field of domestic autonomous desktop CPUs. On November 28, 2023, the company released major achievements such as the next-generation general-purpose processor Dragon Core 3A6000. The Dragoncore 3A6000 processor uses the autonomous instruction system Dragon architecture LoongArch. It is the first product of the Dragoncore fourth-generation microarchitecture. Its overall performance is comparable to Intel's 10th generation Core quad-core processor launched in 2020.

Investment advice: Give an “gain” rating. We are optimistic that the company's business will gradually improve due to cyclical changes in the industry and the growth momentum of desktop products brought about by new information technology chip products. The company's 2024-2026 revenue is expected to be 705/10.14/1,360 million yuan, and net profit to mother - 0.99/0.30/122 million yuan. The corresponding PS is 48.1/33.4/24.9 times, respectively, giving a “gain” rating.

Risk warning: risk of profit forecasting; risk of sharp decline in performance or loss; risk of core competitiveness; risk of supplier concentration; risk of intellectual property disputes; risk of macro-environmental risk; risk of market competition; risk of bad debts; risk of falling inventory prices; risk related to R&D investment; risk of changes in government subsidies.