Description of the event

On August 14, the company released its 2024 semi-annual report. Among them, in the first half of 2024, the company achieved revenue of 3.763 billion yuan, a year-on-year increase of 44.08%; in the first half of the year, it achieved net profit of 0.853 billion yuan, or 25.97% year-on-year, after deducting non-net profit of 0.818 billion yuan, an increase of 32.09% over the previous year. 24Q2 achieved revenue of 2.171 billion yuan, a year-on-year increase of 49.67%; 24Q2 achieved net profit of 0.565 billion yuan, an increase of 28.95% year-on-year, and realized deducted non-net profit of 0.546 billion yuan, an increase of 27.37% year-on-year.

Incident reviews

The company's revenue and net profit continued to grow rapidly in the first half of 2024, while the further increase in inventory volume showed the company's operating confidence. In the first half of 2024, demand for domestic processors increased. At the same time, the company continued to improve product performance and increase market expansion efforts. Customer recognition of the company's products further increased, and cooperation with the company continued to increase in depth and breadth, promoting the rapid growth of the company's business. On the profit side, the company increased its efforts to expand the high-end processor market and actively build an ecosystem, leading to a year-on-year increase of 62.39% to 0.071 billion yuan in the first half of the year, and the sales expense ratio to 1.89%. Meanwhile, in the first half of the year, the company's R&D expenses increased 35.21% to 1.131 billion yuan, and the R&D expenses rate reached 30.06%, mainly due to the company increasing the number of R&D personnel to accelerate the development of new products. The number of R&D personnel increased by 34% in the first half of 2024 compared to the same period last year. In the first half of 2024, the company's net interest rate reached 32.58%, a year-on-year decrease of 1.56%.

Furthermore, as of the end of June 2024, the company's inventory amount was 2.455 billion yuan, an increase of 0.746 billion yuan compared to 1.709 billion yuan at the end of March this year, mainly because the company has further increased its raw material preparation efforts, showing the company's confidence in future downstream demand and business growth.

The company's next-generation DCU and CPU products are expected to accelerate the company's revenue growth. 1) Haiguang DCU deep computing series products are leading in performance in China, supporting full-precision model training. Currently, the latest Deep Computing 2 has been released and commercialized, and the performance has doubled compared to Shenzhen Computing 1. Currently, Haiguang DCU is fully adapted to domestic large models, including Wenxin Yiyan and Tongyi Qianwen, etc., to achieve full application of large models represented by LLLama, GPT, Bloom, ChatGLM, Wudao, and Zidongtai Elementary School. At the same time, research and development of Haiguang's next-generation product Shenzhen Computing 3 is progressing smoothly, and is expected to occupy an important share of the domestic AI chip market in the future; 2) Haiguang CPUs are upgraded and iterated on an intergenerational basis. Currently, the main product is Haiguang 3, and has been used on a large scale in telecommunications, finance, internet, education, transportation, etc., and it is expected that Haiguang 4 will gradually be commercialized in the future. Currently, the company is developing the next-generation CPU Haiguang 5, and the company's share as the leading domestic CPU is expected to continue to increase.

Investment advice

The company's CPU and DCU are in the first tier in China in terms of product performance and industrial ecology, and it is expected that they will continue to benefit from the localized replacement of CPUs and AI chips. The company's 2024-2026 EPS is expected to be 0.73\ 1.02\ 1.37 respectively, corresponding to the company's closing price of 76.60 yuan on August 15, and the 2024-2026 PE is 104.88\ 75.08\ 55.73, respectively. It was covered for the first time, giving it a “buy-A” rating.

Risk warning

The risk of high customer concentration. Due to the obvious leading effect of the server industry, the company's main customers are concentrated among several major domestic server manufacturers, and the customer concentration is high. If demand from major customers falls or the cooperative relationship with the company changes in the future, the company will face the risk of a decrease or loss of customer orders, which will adversely affect the company's performance.

Supply chain risk. The company's suppliers include fabs, packaging and testing plants, IP authorized vendors, EDA tool manufacturers, etc., and the supplier concentration is high. At the same time, due to the high degree of specialization and technical threshold in the field of integrated circuits, the products of some suppliers are scarce and proprietary. If the company is unable to maintain a stable cooperative relationship with them, or if the supplier suspends business cooperation with the company due to other external environmental factors such as the company being on the entity list, the cost of replacing a new supplier is high, which will adversely affect the company's production and operation.

Risk of rising prices for major raw materials. In recent years, as the localization process of the semiconductor industry chain has accelerated, demand for raw materials in the domestic semiconductor industry has continued to rise, and overall procurement prices have shown an upward trend.

If the price of raw materials continues to rise in the future, it will adversely affect the company's operations.

The development of new products fell short of expectations. Product iteration in the high-end processor field is accelerating. If the company delays in CPU and DCU iteration due to factors such as mistakes in R&D direction and insufficient investment in R&D resources, the company's performance will be adversely affected.