The company's recent situation
Recently, we visited Hengshuo Co., Ltd. and made updates to the company: 1) NOR Flash products were successfully introduced downstream of e-cigarettes, and sales grew rapidly; 2) AI accounting reasoning progressed steadily and actively laid out new businesses.
reviews
The company's management judged that NOR Flash will still be the basic market for Hengshuo shares in the next few years. NOR Flash accounts for 85% of 1Q24's revenue, of which more than half are 32 to 128 Mb medium capacity products (about 65%), which are used in downstream consumer electronics such as IoT communications, smart homes, and wearable devices. In 2024, the Q1 company NorFlash successfully introduced e-cigarette products. Currently, the overseas e-cigarette market is booming. We expect this downstream to become an important source of growth for the company this year. In terms of small capacity: The company is actively developing NORD architecture products. According to Juchen Co., Ltd., the NORD process takes into account the high reliability and wide temperature adaptability advantages of the ETOX process and the small size and low cost advantages of the SONOS process. We believe that by expanding NORD process products, Hengshuo Co., Ltd. is expected to increase its share in the small-capacity NOR Flash market. Medium to high capacity: The company's 256Mb NOR Flash product was successfully shipped in Q3 2023, and the 512Mb product is currently being developed according to the plan.
According to the equity incentive plan issued by the company in April 2024, management has set revenue targets of 4.59, 581, and 856 million yuan for 2024, 2025, and 2026 million yuan, with trigger values of 367, 4.28, and 566 million yuan. Management believes that in order to achieve the set revenue targets and trigger values, in addition to developing NOR Flash products, the company also needs to expand MCUs and new businesses including AI accounting and reasoning. MCU: The company successfully designed a low-power M3 core general-purpose MCU product in 2023. Combined with MCU industry chain companies such as Zhongwei Semiconductor and Huahong Company, we judge that the current MCU industry has stabilized. Some materials may have already entered the inventory replenishment stage, and the MCU business of Hengshuo Co., Ltd. is expected to reverse steadily. Integrated storage and calculation: The company's second NOR Flash integrated memory chip has completed streaming and is currently in the debugging stage. In 2023, H2 will start research and development of an SRAM integrated memory and calculation chip. We believe that if progress goes well, the integrated memory and calculation chip is expected to start generating revenue around 2025. TinyML: The company launched the AI module and AI software business in 2023. We saw Q2's AI vision module sales and Q4 AI voice module sales in 2023, with annual revenue of 1.8 million yuan. We expect to maintain rapid growth.
Profit forecasting and valuation
Considering that the recovery in downstream demand for NOR Flash was better than our expectations and the possibility of subsequent price increases, we raised the company's revenue by 15% to 466 million yuan in 2024, but considering the company's high R&D expenses base last year, we kept the company's net profit of 0.09 million yuan basically unchanged; maintained the company's 2025 revenue forecast of 606 million yuan, and the net profit forecast of 75 million yuan remained basically unchanged. The company is currently trading 45.1x P/E in 2025. We used the SOTP method to value the company, keeping the target price of 51.59 yuan unchanged. There is 25% room for an increase compared to the current level, and the industry's performance rating remains unchanged.
risks
Downstream consumer electronics demand/inventory replenishment momentum weakens, competition in the NOR Flash/MCU market intensifies, new NorFlash/MCU product development and introduction falls short of expectations, and new business development falls short of expectations.