1H24 earnings forecast is higher than our expectations

The company released 1H24 performance forecast: 1H24's revenue was 1.665 billion yuan, an increase of 79.49% over the same period of the previous year; net profit to mother was 5.83 to 0.623 billion yuan, up 612.73% to 661.59% over the same period last year, higher than our expectations. The increase in the company's performance is mainly due to the restorative growth of memory interface chips and the increase in the penetration rate of high-margin products. Combined with the recovery in downstream demand driven by AI, 1H24 achieved double growth in revenue and gross profit.

Key points of interest

Increased DDR5 penetration is expected to drive performance growth. In the DDR5 generation, the company took the lead in formulating international standards for related memory interface chips, enjoyed an important voice in this field, and led the relevant technology industry. As the DDR5 penetration rate increases further, we believe that the company's sales revenue for memory interfaces and module supporting chips is expected to increase steadily from month to month. According to the company's announcement, 2Q24's interconnect chip product line sales reached 0.833 billion yuan, an increase of 19.92% over the previous month. The company's DDR5 second-generation RCD chip shipments in the first half of 2024 surpassed first-generation RCD chips. Benefiting from DDR5's continued downstream penetration, the company expects large-scale shipments of third-generation RCD chips to begin at 2H24.

High-performance AI “capacity” chips continue to break through. The rapid growth of AI servers is increasing demand for PCIe Retimer and MRCD/MDB chips. According to the company's announcement: 1) In AI server projects newly purchased by domestic cloud computing/Internet vendors, based on the advantages of product performance and local service support, Lanqi's PCIe Retimer chips are more popular with customers. 2) The server CPU platform supporting the high-bandwidth memory module MCR DIMM is expected to be released in the third quarter of this year. As related platforms begin to be applied downstream, it will drive an increase in demand for MRCD/MDB chips. At the same time, the company took the lead in trial production of the DDR5 CKD chip in April '24, benefiting from the increase in DDR5 penetration rate, and large-scale shipment of the chip began in 2Q24.

The share of new products continues to rise, and the gross margin level is expected to continue to improve. Since DDR4 memory interface chips have entered the late stages of the product life cycle, the supporting chips share revenue with partners, so the gross margin level of the two is low. As the proportion of DDR5 memory interface chips and “capacity” chips continues to increase, we believe that the gross margin level of the company's products is expected to continue to improve.

Profit forecasting and valuation

As the company is expected to continue to benefit from the rising AI market and the increase in DDR5 penetration, we raised the company's 24/25 net profit by 11/6.4% to 1.578/2.393 billion yuan. The company's current stock price corresponds to 45/29.7 times the 24/25 price-earnings ratio. We maintain our outperforming industry ratings. Considering the continuous increase in DDR5 shipments, the company is a global core supplier. We raised our target price by 7.14% to 75 yuan, which has room for an increase of 20.54% compared to the current stock price. The target price corresponds to 54.25/35.78 times the 24/25 price-earnings ratio.

risks

Demand in the server industry fell short of expectations, and DDR5 growth fell short of expectations.