Incident: On August 8, VeriSilicon released its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 0.932 billion yuan, a year-on-year decrease of 21.07%; realized net profit to mother of 0.285 billion yuan, a year-on-year decrease of 1381.89%; realized net profit deducted from mother of 0.304 billion yuan, a year-on-year decrease of 14650.03%. Among them, the company achieved revenue of 0.614 billion yuan in a single quarter, up 92.96% from the first quarter; realized net profit to mother of -0.078 billion yuan, an increase of 62.40% month-on-month; and realized net profit deducted from non-mother of 0.088 billion yuan, an increase of 59.26% month-on-month.

Q2 Performance improved significantly, and gross margin declined. The company achieved revenue of 0.932 billion yuan in the first half of 2024, a year-on-year decrease of 21.07% due to the inventory removal cycle. However, with the gradual recovery of the semiconductor industry, the inventory situation of downstream customers improved markedly, the company's business situation quickly reversed, and business gradually improved. The second-quarter results improved significantly compared to the first quarter. In the second quarter of 2024, the company achieved revenue of 0.614 billion yuan, an increase of 92.96% over the first quarter. Among them, in the second quarter of 2024, the company's mass production revenue was 0.234 billion yuan, up 125.00% month on month; chip design business revenue was 0.193 billion yuan, up 122.04% month on month; intellectual property license fee revenue was 0.16 billion yuan, up 60.60% month on month; and royalty revenue was 0.024 billion yuan, down 11.79% month on month. The company's product gross profit margin for the first half of 2024 was 44.41%, down 3.24% from the same period last year. The main reason was the change in revenue structure and the decline in the gross margin of the one-stop chip customization business. Among them, the gross margin of the one-stop chip customization business was 19.42%, a year-on-year decrease of 59.24%.

R&D investment continues to increase, and the product matrix has been expanded. Overall R&D investment in the first half of 2024 was 0.569 billion yuan, up 28.73% year over year. The company has gradually formed a series of excellent IP, IP subsystems and platform-based IP solutions in the four fields of AIGC, automotive electronics, wearables and data centers. In the AIGC field, in response to the growing demand for massive computing power to support AIGC applications, the company launched AIGPUIP, high-performance GPUIP, and GPGPUIP for high-performance computing, which greatly enriched the company's AI computing technology reserves; in the field of smart cars, VeriSilicon's image signal processor IP has obtained ISO26262 automotive functional safety standard certification and IEC61508 industrial functional safety standard certification.

The IP leader has a stable position and is working in the Chiplet field. According to IPnest's 2024 statistics, VeriSilicon is the number one semiconductor IP authorized service provider in China and the eighth in the world in terms of semiconductor IP sales revenue in 2023. At the same time, the iterative R&D and industrialization of Chiplet technology is also one of the core strategies of VeriSilicon's development. VeriSilicon was one of the first companies in China to join the UCie industry alliance, and is continuing to promote research and development of key functional modules Chiplet, DieToDie interfaces, Chiplet chip architectures, and advanced packaging technology.

Investment advice: Considering downstream changes, we adjusted the company's performance expectations. We expect the company's net profit to be -0.219/0.077/0.261 billion yuan in 24/25/26, respectively, and 25/26 profit corresponding to the current PE price 191/56 times, respectively. The company's business synergy effects are gradually showing, or it may have long-term growth potential, maintaining a “recommended” rating.

Risk warning: downstream demand falls short of expectations; market competition intensifies; risk of exchange rate fluctuations.