Incident: The company released the 2023 annual report and the 2024 first quarter report. The company's revenue for the full year of 2023 was 16.231 billion yuan, -3.30%; net profit to mother was 1.936 billion yuan, -35.64% year over year; deducted non-net profit of 1,614 billion yuan, or -37.21% year over year. The company's Q1 revenue in 2024 was 3.297 billion yuan, -24.62% YoY, +0.55% month-on-month; net profit to mother was 221 million yuan, -78.76% YoY, -11.89% month-on-month; after deducting non-net profit of 209 million yuan, -79.11% YoY, +39.29%.

There are signs of recovery in 24Q1, and I am optimistic that the future price of the product will rise sharply: in 2023, global economic growth will slow down, market demand will shrink, etc., leading to a decline in the company's performance. The company's gross margin in 2023 was 27.10%, -8.76pcts; the net profit margin was 5.22%, -11.02pcts year over year. The decline in gross margin was mainly due to rising raw material and labor costs and rising fixed costs such as equipment depreciation and energy costs in 2023. In terms of expenses, the company's sales/management/R&D/finance expenses rates in 2023 were 0.44%/4.79%/8.99%/3.14%, respectively. The year-on-year changes were -0.06/+0.71/+2.58/-1.69pcts, respectively. The increase in R&D expenses was mainly due to an increase in R&D project expenses and a decrease in R&D expenses offset by government subsidies. In Q1 '24, the company's revenue and gross margin both increased month-on-month, and overall demand in the specialty process market improved. In Q1 '24, the company's capacity utilization rate rebounded markedly. 8-inch and 12-inch production capacity was close to full load, and product prices are expected to rise in the next few quarters.

Adhering to the “Featured IC+ Power Devices” strategy, focusing on the automotive electronics sector: In terms of BCD power management platforms, the company collaborated with leading domestic analog and power management companies to promote various power management chips in the mobile phone market, such as fast charging and wireless charging chips, and were widely recognized by leading terminal brands in the industry, while actively promoting the penetration of power management chips based on the BCD process into the automotive electronics field. The company is committed to building a diverse and characteristic process platform, developing “BCD+” combined processes based on traditional BCD processes, and is in a leading position in China in some fields. Furthermore, the company has achieved mass production of both 12-inch 90nm and 65nm BCDs, and continues to penetrate into emerging fields such as automotive electronics. As some H2 consumer markets bottomed out in '23, the number of BCD power management chips sold returned to a high level. In terms of power device process platforms, through continuous optimization and iterative development of IGBT technology, the company's power devices have the advantages of high current, small size, and high reliability, and are used in fields such as inverters for new energy vehicles and photovoltaics. At the same time, based on deep groove superjunction MOSFET technology, the company has provided customers with high-end chip manufacturing platforms for data center power supplies, vehicle chargers, etc. The increase in the proportion of IGBT products of the company's ultra-fine groove gates and the orderly opening of new superjunction MOSFET technology have gradually increased customer demand in the fields of automotive electronics, new energy and industry. Furthermore, the scale and mass production speed of the company's 12-inch power device production line has always maintained a leading position in the country.

Deepening differences in memory technology is expected to benefit from market size growth: According to WSTS, the memory market size will grow 44.8% year over year to $129.768 billion in 2024. In the long run, the size of the memory chip market is expected to continue to grow, driven by factors such as the Internet of Things, smart cars, industrial robots, and AI computing power. The company is committed to the R&D, innovation and optimization of differentiated technology. In terms of memory, the company mainly focuses on embedded/standalone non-volatile memory, and continues to provide customers with characteristic process technology and services that meet market needs. Among them, embedded non-volatile memories mainly include two types of chip applications: smart card chips and microcontrollers. In terms of smart cards, related products have maintained steady shipments; in terms of microcontrollers, the company has taken advantage of the “8 inch+12 inch” embedded flash memory platform to help customers steadily enter the first tier of the local MCU supply chain in the fields of automotive electronics, major appliances, industrial control, etc. The company has mass-produced and supplied a full range of automotive-grade chip products using the multi-process node eFlash process, and sales revenue from automotive electronics has increased significantly; independent flash memory platforms. The company and customers work together to promote SPI based on self-developed NORD technology and traditional ETOX technology NOR flash memory and EEPROM products, chip products using smaller storage units have been approved by various terminal applications, and many automotive-grade SPI NOR flash memory and EEPROM products are already being mass-produced. Among them, the company's demand for embedded non-volatile memory, including smart cards and MCU products, increased by about 6-7% in Q1 over the previous year. In the future, the company is expected to benefit from the growth of the memory market, thereby opening up room for performance growth.

The profit forecast was lowered and raised to a “buy” rating: the company's capacity utilization rate, sales revenue, and gross margin all increased sequentially in Q1 2024, and the overall market for characteristic processes improved. We are optimistic about the future recovery trend in the semiconductor sector, especially in the storage segment. Combined with the smooth progress of the construction of the company's second 12-inch factory, the company's future performance is expected to continue to recover. Considering weak demand for power devices, the semiconductor storage sector is recovering in the early stages, so profit forecasts were lowered. However, at the same time, considering that the company's 24Q1 gross margin and capacity utilization ratio were recovered month-on-month, it was upgraded to a “buy” rating. The company's net profit for 2024-2026 is estimated to be 1,911 billion yuan, 2,319 billion yuan, and 2,833 billion yuan respectively, EPS is 1.11 yuan, 1.35 yuan, and 1.65 yuan respectively, and PE is 30X, 25X, and 20X respectively.

Risk warning: Risk of industry demand falling short of expectations; risk of exchange rate fluctuations; increased risk of market competition; risk of technology iteration falling short of expectations.