occurrences

The company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 0.92 billion yuan, up 37.96% year on year; achieved net profit of 0.152 billion yuan, up 134.85% year on year; in the Q2 quarter of 2024, the company achieved revenue of 0.533 billion yuan, up 52.78% year on year, up 37.66% month on month; achieved net profit of 0.098 billion yuan, up 191.87% year on year and 81.26% month on month.

Key points of investment

The operating leverage effect has been shown, and profitability has been further enhanced. The company's second most cost-effective product line ESP32-C3, ESP32-C2, and high-performance product line ESP32-S3 are in a period of rapid growth. The company's 24Q2 revenue reached a record high. Under the operating leverage effect, the company achieved net profit of 0.098 billion yuan in a single quarter in Q2, up 191.87% year on year and 81.26% month on month. Supported by multiple factors such as declining raw material costs, increasing new customers and high gross margin in the early stages, increasing the share of chip revenue in handheld miniaturization equipment, and improving the competitive landscape, the company's profitability further improved. The 24H1 comprehensive gross profit margin was 43.20%, of which 49.00% of chips and gross profit margin for modules and development kits were 38.91%, all of which increased year-on-year.

The company's net cash outflow from operating activities was 25.68 million yuan, with a net inflow of 99.7 million yuan in the same period last year, of which: cash received from sales of goods and services increased by 311.31 million yuan year on year, up 46.56% year on year, higher than the increase in revenue; cash from purchasing goods and receiving labor payments increased by 421.9 million yuan year on year, up 130.85% year on year. The company resumed normal preparation cycle, and there was no further pressure to remove inventory. As of 24H1, the company's inventory was 0.376 One billion yuan, an increase of 510% over the end of the previous year; the acquisition of Mingzhan and the company's continuous recruitment led to a year-on-year increase of 27.21 million yuan in labor costs, an increase of 13.03% over the previous year.

Acquiring a controlling interest in M5Stack to expand the industrial, education and developer markets, the technological synergy effect is obvious. On May 27, 2024, the company acquired M5Stack. The M5Stack ecosystem is built around a flagship master control module driven by the company's ESP32 series chips. M5Stack's product portfolio mainly includes controllers and other hardware modules required for IoT application solutions. It is mainly sold to the industrial, education, and developer markets. It is expected to accelerate the company's design process among end customers and ultimately bring more B-side business opportunities to the company's chip and module business.

Entering the larger capacity market, many new products are expected to be released next year. According to semiconductor industry research agency TSR, the company has the highest shipping volume in the Wi-Fi MCU market in the Wi-Fi branch, ranking fifth in the world, after MediaTek, Qualcomm, Realtek, and Broadcom. The products have strong competitiveness in the international market. In the future, the company will expand into fields other than mobile devices based on IoT devices, expanding its market capacity to 2.5 times the current level. Furthermore, the company's product matrix is gradually being enriched. Under the product strategy of continuing to focus on “processing+connectivity”, it is actively exploring new fields such as high-speed digital transmission, Bluetooth, Thread, and high-performance SoCs, and new products will gradually expand in the future. New products other than ESP32-C5 will enter rapid growth next year. Among them, ESP32-C6 has begun to contribute revenue and is in a state of high growth. It is expected to enter the second new category at the end of the year, and the selection in Apple's 2024 WWDC EmbeddedSwiftDemo will provide endorsement for more Apple ecosystem developers to choose the company's products. The ESP32-H2 has already been mass-produced, and mass official shipments are expected to begin in the second half of the year. The H series is expected to start growing rapidly next year. Retail sales of the ESP32-P4 began in early July, and shipments are expected to improve next year. Samples of the ESP32-C5 are expected to be delivered during the year, and small batches for clients will begin next year.

Investment advice

We expect the company to achieve revenue of 2.008/2.553/3.189 billion yuan in 2024-2026, and realized net profit of 0.338/0.46/0.604 billion yuan respectively. The current stock price corresponding to 2024-2026 PE is 34 times, 25 times, and 19 times, respectively, giving it a “buy” rating.

Risk warning:

Market demand falls short of expectations; new product development and market expansion fall short of expectations; market competition intensifies, etc.