Key points of investment:

Focusing on the IoT circuit, starting with a Wi-Fi MCU and continuously expanding its product line, Lexin Technology was founded in 2008, focusing on IoT chip design and solutions. With “connection+processing” as the core, the company provides AIoT MCUs and software, and constructs diverse application scenarios through self-developed chips, operating systems, etc. Lexin ESP series chips, modules and development boards have been widely used in smart products and have become the first choice for IoT applications. The first Wi-Fi chip was launched in 2013. As of September 2023, chip shipments have exceeded 1 billion, and it occupies an industry leading position in the Wi-Fi MCU field.

With “connectivity” and “processing” as the main line of hardware upgrades, Lexin Technology started with Wi-Fi MCUs, grasping mainstream trends in the market. Since the release of the popular product ESP8266 in 2014, it has had a deep technical accumulation and customer reputation in the Wi-Fi MCU segment. In recent years, influenced by technological developments such as the continuous enrichment of wireless communication technology and the continuous evolution of Wi-Fi protocols, Lexin products have expanded from Wi-Fi MCU to Wireless SoC, compatible with more protocols, improved product integration, and further strengthened its market position in the Wi-Fi MCU field. Furthermore, since the ESP32-S3 series, Lexin has enhanced the AI-oriented features of the ESP32-S3 series, using the RISC-V architecture to meet flexibility while reducing R&D costs. In February 2024, Lexin released the ESP32-P4 and began entering the pure high-performance processing market.

Software and ecology complement each other to build a multi-dimensional product moat

The company adheres to the underlying framework self-development strategy. The ESP-IDF operating system is compatible with Lexin's full range of chips and is continuously updated, making it easy for users to quickly complete docking and carry out secondary product development. At the same time, the company provides a variety of software solutions for customers to choose from, and the ESP RainMaker platform can provide customers with a one-stop service of chip+software+cloud. In terms of ecology, the company has built an open and active technology ecosystem using an open source method, created an ESP32 forum and continued to operate various platforms to attract developers to join, continuously enhance user stickiness, and form a good ecological barrier.

Profit forecasting and investment advice

We believe that with 1) the SoC industry gradually ushered in an upward cycle, 2) the large-scale effect of industry leaders showing, and 3) strong support from end-side AI, the overall performance of the SoC sector in 24 is expected to exceed expectations. Currently, comparable companies' 2024-2026 PE valuation has reached 50/31/23 times. As a leading company in the AIoT industry, Lexin has taken the lead in showing a strong performance recovery trend in this upward cycle. We expect the company to achieve net profit of 0.32/0.47/0.63 billion yuan in 2024-2026, corresponding to the current PE valuation of 33/23/17 times. First coverage, giving a “buy” rating.

Risk warning

There is a risk that the consumer electronics recovery will not last as long as expected, the risk of market competition, the risk of technology renewal, and the risk that R&D progress falls short of expectations.