Incident: The company released the 2023 annual report and the 2024 quarterly report. For the full year of 2023, the company achieved operating income of 7.244 billion yuan, a year-on-year decrease of 27.93%; realized net profit of 212 million yuan, a year-on-year decrease of 93.05%; realized deducted non-net profit of 47 million yuan, a year-on-year decrease of 98.36%. In 2024, Q1 achieved operating income of 2,228 billion yuan, a year-on-year increase of 104.44% and a month-on-month increase of 0.06%; net profit to mother was 0.79 million yuan, a sharp year-on-year decrease of 55.88%; after deducting non-net profit of 57 million yuan, a sharp year-on-year decrease of 66.64%.

Slowing demand weighed on performance in '23, and 1Q24 earnings improved sharply year over year: affected by the decline in semiconductor industry sentiment and the slowdown in overall market demand, the company's performance in '23 was heavily pressured. The company's comprehensive gross margin for the full year of 2023 was 21.61%, down 24.55 pcts year on year, mainly due to the year-on-year decline in the company's operating income, while the company's fixed costs such as depreciation and amortization were high; the net interest rate was 1.65%, down 29.75 pcts year on year.

In terms of expenses, the company's sales, management, R&D, and financial expenses rates for the full year of 2023 were 0.69%/3.74%/14.60%/2.13%, respectively, and the year-on-year changes were +0.10/+0.81/+6.07/+1.44pcts, respectively. Among them, the financial expense ratio and value increased significantly year-on-year, mainly affected by exchange rate fluctuations. In Q1 2024, thanks to the recovery in the semiconductor industry and the recovery in overall market demand, the company's overall revenue increased sharply year on year. At the same time, the company's capacity utilization rate remained high, unit sales costs declined, and product gross margin increased year on year, driving a significant year-on-year improvement on the profit side. Among them, the company's overall gross margin in Q1 2024 was 24.99%, up 16.97 pcts year on year; net margin was 3.67%, up 38.19 pcts year on year.

The 40nm high-voltage OLED platform was officially released, and 55nm TDDI achieved large-scale mass production: In 2023, the company's product structure was continuously optimized, and the product matrix continued to expand. On the one hand, looking at process nodes, 55nm, 90nm, 110nm, and 150nm accounted for 7.85%, 48.31%, 30.47%, and 13.38% of the main business revenue in 23 years; of these, 55nm accounted for a year-on-year increase of 7.46pcts, mainly because the company achieved large-scale mass production of 55nm within 23 years and its high market demand, and the 55nm capacity utilization rate continued to remain at a high level. On the other hand, the company's 55nm single-chip, high-pixel back-illuminated image sensor (BSI) has been mass-produced; 40nm high-voltage OLEDs have successfully illuminated panels and are expected to be mass-produced in small batches in Q2 2024. Furthermore, the company actively cooperates with the needs of the automotive industry chain and lays out the automotive chip market. In 2023, the company joined upstream and downstream of the industrial chain to form the Anhui Automobile Chip Alliance, which attracted more than 30 member organizations, including car companies, chip design companies, universities, etc., and has initially formed an industrial ecosystem. In terms of automotive chip manufacturing capacity building, the company has obtained international automotive industry quality management system certification and passed vehicle regulation verification on multiple process platforms.

New AR/VR applications are developing rapidly, and the layout of silicon-based OLEDs is expected to open up long-term space: According to the Chinese Academy of Information and Communications Technology's forecast, the average annual growth rate of the global AR/VR industry in 2020-2024 is about 54%, and the global AR/VR market is expected to reach 480 billion yuan in 2024. Currently, AR/VR micro display technology mainly uses two micro display solutions: LCoS (liquid crystal on silicon) and OleDOS (organic light emission on silicon). Mini/Micro LED inherits the advantages of OLED, and has better performance in terms of miniaturization, low power consumption, high color saturation, and response speed. At the same time, it has a longer service life than OLED, which can basically meet all the technical requirements of AR/VR for micro displays, so Mini/Micro LED is expected to become the next generation of mainstream display technology. In the field of AR/VR micro displays, the company is developing silicon-based OLED-related technology, and has developed in-depth cooperation with leading domestic panel companies to accelerate application implementation. In the future, as the AR/VR market continues to expand and the company makes breakthroughs in silicon-based OLED technology research and development, the company is expected to further open up room for performance growth.

Lowering the profit forecast and maintaining the “gain” rating: The company is mainly engaged in the 12-inch wafer foundry business and provides 150nm to 90nm foundry services. The main products it manufactures are panel display driver chips, which are among the leading pure wafer foundry companies in the industry. In 2023, the company's R&D project progressed smoothly, and 55nm TDDI products achieved large-scale mass production. The 40nm high-voltage OLED platform is expected to be mass-produced in small batches in Q2 in '24; 110nm DDIC has completed AEC-Q100 vehicle grade certification and passed the customer's 12.8-inch display assembly reliability test. In the future, with the recovery in consumer electronics demand, the DDIC industry's boom will continue to pick up, the company's performance is expected to recover quarterly, and profitability is expected to continue to improve. Furthermore, as the company continues to make breakthroughs in research and development of advanced manufacturing processes and new technology process platforms, the company is expected to further open up incremental markets for new displays and automotive electronics. Considering that the company's R&D investment remains at a high level and depreciation pressure has increased dramatically due to the transformation of early investment and construction projects, the profit forecast was lowered. It is estimated that the company's net profit due to 2024-2026 will be 784 million yuan, 1,191 billion yuan, and 1,476 billion yuan, EPS 0.39 yuan, 0.59 yuan, and 0.74 yuan respectively, and PE 38X, 25X, and 20X, respectively.

Risk warning: Risk of demand recovery falling short of expectations; risk of high customer concentration; risk of exchange rate fluctuations; increased risk of industry competition.