Incident: The company released its 2023 annual report and 2024 quarterly report. The company achieved revenue of 1,433 billion yuan in 2023, an increase of 12.74% year on year; realized net profit of 136 million yuan, an increase of 39.95% year on year; realized deducted non-net profit of 109 million yuan, an increase of 63.55% year on year. In Q1 2024, we achieved revenue of 387 million yuan, up 21.71% year on year and 4.66% month on month; realized net profit of 54 million yuan, up 73.43% year on year and 9.95% month on month; realized deducted non-net profit of 48 million yuan, up 88.56% year on year, up 17.78% month on month.

Rapid growth in 23, year-on-year increase in profitability in Q1: The company's performance grew rapidly in the full year of 2023, mainly due to: 1. The company continues to expand its product matrix, new customers and new businesses, bringing growth to the company's performance; 2. The next new class of cost-effective products, ESP32-C3, and the high-performance product line ESP32-S3 successfully entered a phase of rapid growth in '23. The company's performance in Q1 in 2024 achieved year-on-year growth, mainly due to: 1. New and old customer business are all contributing to growth; 2. The expanded product matrix can meet a wider range of customer application requirements. In Q1 2024, the company's gross margin was 41.93%, up 1.22pct year on year and 1.86pct month-on-month. Mainly structural changes caused by an increase in the share of chips, module gross margin increased year on year; the company's net margin was 13.92%, up 4.15 pcts year on year, up 1.85 pcts month on month; the company's profitability further increased year on year. In terms of expenses, the company's sales, management, R&D and financial expenses in Q1 2024 were 3.32%/3.84%/26.82%/-0.49%, respectively, with year-on-year changes of -0.51/-0.53/-0.05/+0.66pct, respectively. As the product matrix continues to expand, the company's product line is becoming more and more diverse, which can meet the different needs of users. Both the cost-effective product line and the high-performance product line are showing a growing trend. We believe that, benefiting from the next new category entering a period of rapid growth, the company's future performance is expected to further improve.

The new flagship products continue to grow and continue to expand the product matrix: Following ESP8266 and ESP32, ESP32-S3 and ESP32-C3 have become the company's new flagship products, contributing significantly to the company's performance growth. The ESP32-S3 product line has shown significant growth in demand in LCD screen-related applications and AI voice control markets. The company's ESP32-C2, ESP32-C6 and ESP32-H2 chips have all been mass-produced. The company's chip product line continues to expand, from a single Wi-Fi chip to chips that now cover various connectivity technologies such as 2.4 & 5 GHz Wi-Fi 6, Bluetooth, and Thread/Zigbee, and Wi-Fi 6E will be added in the future; the company will continue to enhance edge AI functions, such as voice AI and image AI. For different AI applications, the company adopts two development models: 1. High-end solution: The company uses its own Wi-Fi and Bluetooth enabled products for data transmission, with complex AI algorithm applications from third parties, especially AI applications in the cloud; 2. Low-cost solution: Apply AI algorithms to its own MCU and develop an SoC integrating the AI MCU with wireless connectivity. At present, the company has simultaneously developed offline voice waking/recognition technology based on the ESP32-S3 chip, which can be widely used in smart home devices; the ESP32-P4 chip supports more functions, has higher computing power, can meet the high-performance computing needs of multiple IO, HMI and AIoT applications, and is currently used in application scenarios that require combined camera, screen and AI processing.

As the company's chip product line continues to expand, the variety of products continues to increase, and the open source ecosystem is built, the company's performance is expected to continue to grow, and the company is expected to maintain its core competitiveness.

Chip orders are growing rapidly, and equity incentives show confidence in development: According to the China Business Industry Research Institute report, the IoT market size is about 3.5 trillion yuan in 2023, and it is predicted that the national IoT market will reach 4.31 trillion yuan in 2024, and there is considerable room for growth in the Internet of Things. The increase in the number of Internet users, the increasing popularity of smart devices, and the increasing importance of remote home monitoring are driving the gradual expansion of the smart home market. In 2023, the company's cumulative global shipment volume of IoT chips exceeded 1 billion, an increase of 22.83% over the previous year, and the company's chip orders grew rapidly. On March 12, 2024, the company announced the 2024 restricted stock incentive plan: This incentive plan grants the incentive target a total of 1,073.25 million restricted shares, accounting for about 1.33% of the company's total share capital, and the grant price is 50.00 yuan/share. For the first type of incentive target, the company's performance assessment target is: the 24-25 performance growth trigger value is not less than 1,500/1,651 billion yuan, respectively, or the compound growth rate for the year 2022 to 2024/2025 is higher than the lowest value of the 3 comparable companies in the same industry, the target value is 1,720/2,064 billion yuan or the average compound growth rate for the year 2022 2024/2025 is higher than the average of 3 comparable companies in the same industry; for the second type of incentive target, the company's performance assessment target is: the 24-27 performance growth trigger value is not less than The average compound growth rate of 15.00/16.51/19.81.377 billion yuan or the 2024/2025/2026/2027 compound growth rate is higher than the lowest value of the 3 comparable companies in the same industry, and the target value is 17.20/20.64/24.76/2,971 billion yuan, or the compound growth rate for all 2024/2025/2026/2026/2027 is higher than the average of the 3 comparable companies in the same industry; among them, the comparable companies are: Realtek, Nordic Semiconductor , Silicon Labs. The purpose of this incentive plan is to further improve the company's long-term incentive mechanism, attract and retain outstanding talents, fully motivate the company's employees, and combine shareholders' interests, company interests, and employees' personal interests.

Raise profit forecasts and maintain a “buy” rating: The company's basic R&D capabilities based on Wi-Fi have successfully expanded to other wireless connectivity technologies, including low-power Bluetooth, Thread/Zigbee, etc., to further broaden the company's technical and market boundaries. It is expected that the future will continue to benefit from a recovery in downstream demand and an increase in the penetration rate of downstream intelligence, and the company's performance is expected to rise to the next level. We are optimistic about the continued development of the company's product application categories and the continuous development of AI applications, so we raised our profit forecast. We expect to achieve net profit of 1.85/26/377 million yuan respectively in 2024-2026, corresponding EPS of 2.29/3.29/4.67 yuan, respectively. The PE corresponding to the current stock price is 46X/32X/23X, respectively.

Risk warning: risk of exchange rate fluctuations, downstream demand recovery falling short of expectations, risk of technological innovation, risk of market competition.