1H24 results are in line with market expectations

The company announced 1H24 results: revenue of 1.249 billion yuan, up 46.4% year on year; net profit to mother 0.183 billion yuan, up 637% year on year. Among them, 2Q24's revenue for a single quarter was 0.706 billion yuan, up 34.8% year on year, up 29.9% month on month, and net profit for the single quarter was 0.115 billion yuan, up 167% year on year, up 70.2% month on month. The performance was in line with market expectations. The increase in performance was mainly due to recovery in demand, the release of the company's flagship products, and improved gross margin.

Development trends

The penetration rate in the AIoT field has increased, and the number of flagship chips continues to be released. According to the company announcement, various AIoT product lines represented by the RK3588, RK356X, and RV1103/1106 series have grown in groups, and shipments of computing power platforms have continued to increase. Among them, the number of designated customers and projects for the RK3588M flagship chip in the smart cockpit field has increased dramatically, further gaining market recognition. As demand from downstream terminal customers grows and the company's product structure is optimized, we are optimistic that the company's AIoT flagship chip shipments will increase, which will become the main driving force for the company's revenue increase.

Stabilize high R&D investment and seize the AI layout on the end side. 1H24 invests 0.26 billion yuan in R&D expenses, accounting for 21% of revenue. The company continues to invest heavily in R&D to consolidate its core technical advantages. The company announced the launch of the next-generation AIoT processor RK3576 and the intelligent audio processor RK2118, etc., to continuously improve the AIoT chip product layout. The RK3588/3576 uses a high-performance CPU and GPU core and has a 6T NPU processing unit. The running speed of models with mainstream 2B parameters on the end side can reach more than 10 tokens per second, meeting the needs of small models deployed on the edge and end sides.

The company announced that RK3576 chips are expected to be mass-produced and shipped on a large scale in the second half of the year. We are optimistic that 3576 chips and 3588 chips will collaborate to open up market space in high-end applications.

There is a clear upward trend in gross margin, and operating cash flow has improved. 1H24's gross margin reached 35.91%, a year-on-year increase of 1.99 ppts, mainly due to product structure optimization. According to the company's announcement, inventory at the end of 2Q23 was 1.507 billion yuan, down 32% to 1.031 billion yuan at the end of 2Q24. Inventory levels declined for four consecutive quarters, and operating cash flow continued to improve. We believe that by continuously optimizing the product structure and improving supply chain management capabilities, the company's gross margin level is expected to be further repaired.

Profit forecasting and valuation

Due to the continuous release of flagship products, we kept our 24-year revenue forecast unchanged at 2.822 billion yuan, and raised our 25-year revenue by 1.8% to 3.623 billion yuan. Considering product structure optimization and gross margin restoration, we raised our 24/25 net profit by 25.3% and 12.4% to 0.423 billion yuan and 616 million yuan. Considering the slight decline in the industry's valuation center, we kept our outperforming industry rating and target price of 68 yuan unchanged. Considering the return of gross margin to 25, which is normal, switch the valuation year to 25, and the target price corresponds to 46 times P/E in 25 years. The current stock price corresponds to 25 times the P/E in 36 years, with 28.7% room for growth.

risks

Demand/introduction of new products fell short of expectations, competition intensified, and trade frictions led to supply chain instability.