1H24 results are in line with our expectations

The company announced 1H24 results: revenue of 0.515 billion yuan, up 62% year on year and 33% month on month; net profit to mother was 0.143 billion yuan, up 125% year on year and 288% month on month, in line with our expectations.

Among them, 2Q24's revenue for the single quarter was 0.27 billion yuan, up 54% year on year, up 8% month on month, and net profit for the single quarter was 0.09 billion yuan, up 118% year on year and 80% month on month, which is in line with our expectations.

Development trends

The company has been developing and selling a series of SPD products supporting DDR2/3/4 memory modules since the DDR2 generation. DDR5 Era has cooperated with Lanqi Technology to develop supporting SPD products with a first-mover advantage and market-leading position. According to our estimates, the company's share in this area is still above 50%. In 2023, we experienced a decline in performance due to inventory removal from the industry. Since 1Q24, it has been mainly driven by the SPD business, and the company's performance showed a clear month-on-month improvement trend. We believe that the increase in DDR5 penetration rate is a highly deterministic event in the next 2-3 years. As the industry pulls and repairs and demand improves, although SPD gross margin may decline slightly as scale increases, the company's performance is expected to maintain rapid growth.

The company has developed a series of NOR Flash products with independent intellectual property rights based on the NORD process platform. The product capacity covers the 512 Kb-128 Mb capacity range. According to the company announcement, NOR Flash products with a capacity of 512 Kb to 32 Mb have been shipped in large quantities, and 64 Mb to 128 Mb NorFlash products have successfully completed streaming. Compared with similar products on the market, the NOR Flash products developed by the company have outstanding performance in terms of reliability and temperature adaptability. We expect that in 2024, as demand for NorFlash improves, the company's products will accelerate customer and downstream development, bringing growth elasticity to the revenue side (profitability is still low). The company announced that downstream shipments include e-cigarettes, TWS Bluetooth headsets, AMOLED mobile phone screens, and PLC components. Product sales in the first half of the year exceeded 0.17 billion units.

Other business aspects: In the field of automotive-grade EEPROM competition, the company now has a full range of automotive-grade EEPROM products of grade A1 and below, and will further develop automotive-grade EEPROM products that meet different levels of ISO26262 functional safety standards. According to the company's announcement, the company has cooperated with some leading smartphone manufacturers to develop closed-loop and optically anti-shake voice coil motor driver chip products to meet the market needs of high-end and flagship smartphones, and to achieve small-batch supply to some customers in 1H24.

Profit forecasting and valuation

Due to the volume of NOR Flash, we raised our 2024/25 revenue by 5.3% and 6.7% to $11.2 billion and 1.46 billion yuan. Considering the increase in NOR revenue and the annual decline in SPD prices, we lowered our 2024/25 net profit forecast of 10.2% and 3.3% to 0.338/0.489 billion yuan. We maintained our outperforming industry rating and lowered our target price by 12.5% to 70 yuan, corresponding to 32.9 times P/E in 24. The current stock price corresponds to 23.2 times P/E in 24, with room for 42% increase.

risks

The DDR5 penetration rate fell short of expectations, market competition intensified, and product promotion fell short of expectations.