Event: The company released its annual report for 2023 and the first quarter of 2024. In 2023, we achieved operating income of 1,127 billion yuan, +21.87% YoY; realized net profit of -48 million yuan, or -158.06% YoY. In the first quarter of 2024, we achieved operating income of 405 million yuan, +98.52% year on year, and +12.51% month on month; realized net profit of 50 million yuan, +277.41% year over year.

Comment: Positive revenue growth was achieved throughout 2023. In terms of profit, with the gradual recovery of downstream demand for consumer electronics products, etc., 23Q4 successfully turned a loss into a profit. 24Q1 continued to maintain profit, and net profit to mother increased 277.41% year-on-year. The 24Q1 company's gross profit margin was 31.8%, +9.64pct year on year, compared with the lowest gross margin of 23Q2 +12.45pct. I am optimistic that the recovery in downstream demand will drive the upward development of the storage industry, and superposition the company's “Storage+” product layout to help improve performance steadily.

1) The year-on-year increase in the company's revenue for the full year of 2023 and 24Q1 is mainly due to a recovery in downstream demand for consumer electronics products, etc. starting in the second half of 2023. At the same time, the company's active strategy to expand market share was effective, and the company's product shipments increased significantly.

2) The year-on-year increase in 24Q1 net profit is mainly due to changes in operating income and gross margin. 24Q1 sales revenue increased by 209.506 million yuan over the same period last year, and corresponding increase in gross profit. ① ② The growth rate of expenses during the period such as R&D expenses was less than the revenue growth rate. In 24Q1, sales, management and R&D expenses increased by 8.7933 million yuan year-on-year, an increase of 13.28%, which was less than the increase in revenue, and the scale effect gradually became apparent. ③ In preparation for inventory price reductions, 24Q1 confirmed asset impairment losses of 1.614,900 yuan, a year-on-year decrease of 37.6559 million yuan. ④ Changes in investment profit and loss. 24Q1 confirmed the change in fair value of Huada's nine-day strategic placement - 13.29 million yuan, and the revenue from fair value change decreased by 33.24 million yuan over the same period last year.

In terms of NOR Flash products, the company maintains the advantages of low power consumption and high reliability. SONOS and ETOX processes complement each other, and products and processes are continuously optimized. In terms of the SONOS process, the competitiveness of the full range of Flash products under the SONOS process 40nm node continues to improve, and the wafer yield rate has reached a new high. The third-generation GS N series Flash product, which supports ultra-low voltage of 1.1 V, ultra-low power consumption, and dual-edge data transmission bandwidth, was released. It supports the main SoC chip to match next-generation standard voltages. While simplifying system power design, it achieves industry-leading power consumption, providing essential storage assistance for multi-module SoC smart control chips such as wireless, audio, and image. In terms of the ETOX process, based on the ETOX process platform and combined with the existing low power consumption design, the company has formed a complete ETOX NOR Flash product line with medium to large capacity under the 50nm and 55nm processes and suitable for different voltages. It is used in the fields of wearable devices, security, industrial control, etc., and forms large-scale mass production and shipment, and will become one of the main drivers for the company's growth in the future.

In terms of EEPROM products, automotive standard and high-capacity data center products were shipped smoothly. The company's high-reliability products cover vehicles and industry, and continue to lead in the field of low power consumption. The automotive series EEPROM products have obtained the AEC-Q100 Grade1 automotive grade high reliability certification, and continue to expand to other domestic and foreign customers. The company launched an innovative P24C series of high-reliability EEPROM products. Based on a process of 95nm and below, they have characteristics such as low power consumption, ultra-wide voltage coverage, and high reliability, which meet the high reliability requirements of 10 million erasure times and 100 years of data storage. The product performance has reached the leading level in the industry, and can be used in industrial three-meter and other high-reliability product fields. In 2023, the company's industry-leading next-generation 1.2V EEPROM will be mass-produced, supporting ultra-low voltage and high speed modes.

Implement the “storage +” strategy to expand the market into higher value-added fields and more diversified microcontrollers and analog chips. In the MCU field, the company uses the synergy of design and process to optimize embedded memory technology on advanced logic process platforms and build MCU product platforms with general performance and high reliability. In 2023, the company successively launched 12 series of more than 100 MCU chip products with ARM M0+ and ARM M4 cores, covering 55nm and 40nm process processes. The products support mainstream interfaces such as 24MHz~144MHz, 24K~384KByte Flash storage capacity, USB/CAN/SDIO, and various packaging forms of 20 to 100 IO, forming a wide voltage, low power consumption, and high quality, high reliability, and high cost performance ratio of 105 ℃ and 125 ℃ The general product matrix completes the multi-faceted layout from entry-level to mainstream MCU, and is used in the fields of home appliances, monitoring, communication transmission, BMS monitoring and protection, motor drives, medical care and personal care. In the field of analog products, the company has formed an effective collaboration between the memory product line and the microcontroller product line. ① Open loop VCM Driver: In the field of analog products, the company has shipped multiple PE series voice coil motor driver chips (2 in 1) with built-in non-volatile memory in large quantities, and 1.2V PD series voice coil motor driver chip products that support next-generation main control platforms have also been mass-produced and shipped. ② OIS VCM Driver: The OIS product line layout has been gradually improved, can support traditional OIS solutions and emerging OIS solutions, fully cooperates with motor manufacturers to meet the needs of core customers, mainly mobile applications, and is ready for rapid future growth. ③ Pre-drive products: The launch of drive chips for use in the BLDC motor field combined with microcontroller products will help MCU products better serve customer needs in the fan and water pump categories.

Launch a new equity incentive plan to attract and retain outstanding talents and be optimistic about the company's long-term development. The company announced the 2024 Restricted Stock Incentive Plan (draft). The number of restricted shares to be granted incentives is 457,500 shares, accounting for about 0.61% of the company's total share capital. The plan is conducive to establishing and improving the company's long-term incentive and restraint mechanism, and effectively enhances the cohesion of the core team and the core competitiveness of the enterprise. Equity incentives correspond to the 2024/2025/2026/2027 revenue growth rate assessment target trigger values of 15%/25%/40%/60%, respectively, and corresponding revenue of 12.96/14.09/15.78/1.80/1,803 billion yuan, respectively. The target values are 45%/70%/120%/160%, respectively, corresponding revenue of 16.34/19.16/24.80/2,930 billion yuan, respectively.

Investment advice: In the second half of 2023, downstream demand for consumer electronics products will pick up, and the company will continue to maintain a high level of R&D investment. The “storage+” strategy and diversified product expansion are expected to drive the company's performance growth in the long term. We raised our profit forecast. We expect the company's net profit to be raised from 1.06 billion yuan to 2.04/296 million yuan in 2026. The company is expected to achieve a net profit of 388 million yuan to maintain the company's “buy” rating.

Risk warning: customer development is not going well, labor costs are rising, R&D technicians are lost, and cycle recovery falls short of expectations