Incident Overview

The company announced its 2024 mid-year report results: achieved operating income of 0.92 billion yuan in the first half of the year, an increase of 38.0% year on year; achieved net profit due to mother 0.152 billion yuan, up 134.9% year on year; realized net profit after deducting the impact of share payments was 0.146 billion yuan, up 170.1% year on year; achieved net profit of 0.167 billion yuan after removing the impact of share payments, an increase of 117.3% year on year.

Q2 achieved revenue of 0.533 billion yuan, up 52.8% year on year and 37.7% month on month; realized net profit of 0.098 billion yuan, up 191.9 percent year on year, up 81.3% month on month; realized net profit deducted from mother 0.098 billion yuan, up 243.8% year on year, up 104.1% month on month.

Increased gross margins, reduced expense ratios, and increased profit elasticity

1. By product, the chip business increased its share of revenue from 33.2% in the same period in 2023 to 41.4%. Among these new, cost-effective product lines ESP32-C3 and ESP32-C2, as well as the high-performance product line ESP32-S3, are in a phase of rapid growth. The expanded product matrix can meet a wider range of customer application needs, and ultimately achieved overall revenue growth.

2. Gross margin increased 2.35 percentage points. Looking at the breakdown, gross margins of chips and modules and development kits increased by 1.49 percentage points and 1.43 percentage points, respectively. The main reasons include: 1) the price of raw materials is low; 2) the number of new customers is increasing, and gross margin is high when the upfront volume of new customers is small; 3) the volume of handheld miniaturized equipment tends to directly use chips, leading to changes in the revenue structure; 4) the competitive landscape is improving.

3. The three cost rates were 3.14%, 3.48%, and 23.76%, respectively, down 0.69 percentage points, 0.86 percentage points, and 2.95 percentage points from the previous year. The reduction in the cost ratio shows that the scale effect of the company's business is gradually being reflected.

4. The net cash outflow from operating activities was $25.68 million, which was a net inflow for the same period last year. The main reasons include:

1) Cash received from sales of goods and provision of services increased by 0.31 billion yuan year on year, up 46.6% year on year, higher than the increase in revenue. 2) Cash for purchasing goods and receiving labor payments increased by 0.42 billion yuan year on year, up 130.9% year on year. 3) The total number of people in the company was 728, an increase of 23.2% over the previous year.

5. Inventory was 0.376 billion yuan, mainly due to the resumption of the normal preparation cycle this year. Inventory increased by 510% compared to the end of the previous year.

The acquisition of Mingzhan Information, enriches the product matrix, and expands the industrial, educational and developer markets. On May 27, 2024, the new subsidiary Shenzhen Mingzhan Information Technology Co., Ltd. was acquired, funded by Lexin Technology. The shareholding ratio and voting rights were 57.1%. The company's product portfolio includes controllers and other hardware modules required for IoT application solutions, and is mainly sold to the industrial, education, and developer markets. The acquisition is expected to accelerate the design process of the company's products among end customers, and ultimately bring more B-side business opportunities to the company's chip and module business.

Investment advice

We believe that the company focuses on developing wireless communication chips with excellent performance and low power consumption. In the future, as the trend of “marginal” computing develops, more AI and computing capabilities will be given to edge devices, which will bring more room for development to the company's business.

We expect the company to achieve revenue of 19.7/24.3/30.0 billion in 2024-2026 (17.9/23.1/29.0 in 2024-2026, respectively), up 38%/23%/24% year over year (previous value increased 25%/29%/26% respectively in 2024-2026); achieve net profit to mother of 3.0/3.9/5.1 (previous value 1.9/2.7/3.6 billion in 2024 to 2026, respectively), with a year-on-year increase of 121%/29%/30% (previous value) (Growth of 38%/41%/35% in 2024-2026, respectively), maintaining the “buy” rating.

Risk warning

1) Downstream demand falls short of expectations; 2) New product promotion falls short of expectations; 3) Market competition intensifies.