VeriSilicon Co., Ltd. released its 2024 mid-year report. Heated demand drove Q2 losses to sharply narrow VeriSilicon's 2024 mid-year report. Among them, 2Q24 achieved revenue of 0.614 billion yuan, down 4.7% year on year, but increased 93.0% month-on-month, mainly due to the chip mass production business increasing 125.0% month-on-month; 1H24 R&D expenses were 0.569 billion yuan, up 30.3% year on year, accounting for 61.0%, dragging down net profit from 0.3 billion yuan year on year to -0.285 billion yuan. With the gradual recovery of the semiconductor industry, the inventory situation of downstream customers improved, and the company's 2Q business situation improved rapidly, achieving net profit to mother of -0.078 billion yuan. Losses narrowed sharply by 62.4% compared to the first quarter. Considering the company's increased investment in strategic R&D projects such as AIGC, we expect net profit to be -0.212/0.009/0.105 billion yuan for 24/25/26. The chip customization/IP licensing business was assessed separately at 7.0/20.7x 24E PS (comparable to the average expected value of 4.8x/15.9x. The premium is mainly based on VeriSilicon being a scarce target for A-shares and has a significant competitive advantage in the HPC/AI field), and the target price was adjusted to 52.32 yuan to maintain the purchase.
IP business: Q2 revenue increased month-on-month, and AI demand drove GPU/NPU/VPU revenue growth. Q2's IP licensing business revenue was 0.184 billion yuan, down 32.1% year-on-year and 45.2% month-on-month.
Among them, revenue from the intellectual property license royalties business was 0.16 billion yuan, an increase of 60.6% over the previous month. The number of authorizations continued to grow, reaching 65 (53 in Q1). We believe that driven by market demand such as AI computing power, the company's demand from data processing and end-side AI increased rapidly, and GPU/NPU/VPU revenue grew rapidly month-on-month. 1H24 together accounted for 70% of the total revenue of the IP licensing business. In the medium to long term, we are optimistic that VeriSilicon will continue to benefit from the AIGC wave and Chiplet trends. VeriSilicon's NPU IP has been used by 72 customers in 128 AI chips in various markets, and demand for AI related IPs with advantages such as GPGPU/NPU IP is expected to maintain a rapid growth trend in the future.
Customization business: Q2 revenue achieved year-on-month growth, and on-hand order amounts remained high for three consecutive quarters. Q2's chip customization business revenue was 0.427 billion yuan, up 15.3% year-on-year and 123.7% month-on-month.
Among them, the mass production business achieved revenue of 0.234 billion yuan, an increase of 125.0% over the previous month; the chip design business achieved revenue of 0.193 billion yuan, an increase of 122.0% over the previous month. Since the end of 2023, downstream customer inventory has improved markedly. The company's on-hand orders have remained high for three consecutive quarters. As of 1H24, on-hand orders were 2.271 billion yuan. Among them, the order amount for the chip design business was 1.038 billion yuan, which is a historically high level; the order amount for the mass production business was 0.754 billion yuan, an increase of 20.6% over the previous year. The company expects the conversion rate of on-hand orders to be 81% within one year, and the company's future revenue base is stable.
Adjust the target price to $52.32 and maintain the “buy” rating
Considering the increase in the company's short-term investment in strategic projects such as AIGC, we expect net profit to be -0.212/0.009/0.105 billion yuan for 24/25/26. The chip customization business/IP licensing business was given revenue of 1.44/0.78 billion yuan in 24 years, 7.0x/20.7x PS, adjusted the target price to 52.32 yuan (previous value 70.00 yuan), and maintained a “buy” rating.
Risk warning: risk of R&D failure, risk of localization falling short of expectations, risk of macroeconomic downturn.