On September 2, the company announced 2 incentive plans and 1 employee stock ownership plan to assess medium- to long-term profits and market value in all aspects. Executives are strongly linked to shareholders' interests, demonstrating confidence in the company's development.

“The 3rd Board of Directors Core Executives Incentive Plan”: Assess medium- to long-term market value and net profit for the chairman and general manager.

1) Motivators: Motivate 2 people: Mr. Yang Chonghe, Chairman and Mr. Stephen Kuong-Io Tai, General Manager.

2) Number of shares and exercise price: 11.4 million restricted shares (0.998% of the total share capital) +11.4 million share value-added rights (0.998% of the total share capital) were granted, and the 2 incentive recipients were equally divided. The exercise price of restricted stocks and stock value-added rights is 46.50 yuan/share, which is 7% off based on the 9/2 closing price.

3) Assessment goal: To assess 2026/2027 net profit (A) and market value (B). A and B both set trigger values (n) and target values (m). A and B each allocate 50% of the exercise weight, A (B) unlocks 80% of the trigger value and reaches 100% of the target value. 2026/2027 An was 1.8/2.25 billion yuan, Am was 2.4/3 billion yuan; Bn was 75/80 billion yuan and Bm was 90/100 billion yuan in 2026/2027.

4) Expense amortization: The 2024-2028 amortized cost is 0.009 billion, 0.036 billion, 0.036 billion, 0.022 billion, and 0.004 billion yuan, totaling approximately 0.11 billion yuan.

The incentive plan targets the chairman and general manager of the company. The exercise price is less discounted, and the management is double assessed on net profit and market value. For the first time, the company included market value in the management assessment. The market capitalization target for 2027 was 100 billion yuan, the 9/2 market capitalization was 57.1 billion yuan. Executives' interests were highly linked to shareholders' interests, and the 2026/2027 net profit target was 2.4/3 billion yuan, showing high confidence in growth.

“2024 Restricted Stock Incentive Plan”: For non-executive employees, the assessment goal is to continue the 23-year incentive plan.

1) Incentive targets: 289 people (excluding directors, executives and core technical personnel), accounting for about 39% of the total number.

2) Number of shares and exercise price: 4.541 million shares were granted, accounting for 0.4% of the total share capital. The exercise price is 26.6 yuan/share.

3) Assessment goal: 2024/2025/2026 gross profit trigger value 1.7/1.7/1.9 billion yuan, target value 1.9/2.1/2.3 billion yuan, achieve the ratio of trigger value unlocking [actual gross profit/target value], and reach 100% of the target value unlocked.

4) Expense amortization: The 2024-2027 amortized cost was 0.014 billion, 0.047 billion, 0.021 billion, and 0.007 billion yuan, totaling approximately 0.089 billion yuan.

The incentive plan covers 39% of employees, excluding directors, executives and core technical personnel. The overall assessment goal continues the 23-year incentive plan and remains consistent.

“2024 Employee Stock Ownership Plan”: 4 executives account for 30% of the shareholding plan, and executives increase their stock holdings.

1) Participants: No more than 75 participants, including 4 executives, Chairman Yang Chonghe, General Manager Mr. Stephen Kuong-Io Tai, Deputy General Manager & Chief Financial Officer Ms. Su Lin, and Director Fu Xiao. The 4 executives together account for 30% of the shareholding plan.

2) Number of shares: The total amount of capital to be raised is not more than 0.35 billion yuan. Based on the 9/2 closing price of 49.95 yuan/share, the number of shares that the employee plans to hold is 7.007 million shares, accounting for 0.61% of the total share capital.

3) Shareholding price: Buy back shares in a special securities account through a bulk transaction. The purchase price is not less than 80% of the closing price on the trading day before the transfer date; according to the secondary market price.

DDR5 related products: DDR5 penetration rate is expected to be 50% + in 24 years, and new MRCD/MDB and CKD products will be released rapidly in 24 years.

1) DDR5 penetration rate and child generation upgrade: 24Q3 DDR5 interface chip shipments are expected to exceed DDR4.

The DDR5 penetration rate is expected to exceed 50% in 2024. AI servers and AI PC memory cards directly use DDR5 products to accelerate DDR5 penetration. Currently, DDR5 is planning 5 sub-generations and following CPU iterations. The memory interface chip needs to be upgraded. The memory interface chip is mainly used in servers. On the server side, Intel supports the third-generation CPU platform Sierra Forest, which was launched in June 2024. Lanqi 24H1 second-generation RCD shipments surpass that of the first generation. The third-generation 24H2 is expected to begin large-scale shipments. The fourth-generation product was launched in January '24, and the fifth-generation RCD research and development will be carried out. The Lanqi generation continues to lead the industry in upgrading and iteration, helping to be highly profitable. In addition, the company expects DDR5 interface chip shipments to exceed DDR4 interface chips in 24Q3.

DDR4 was upgraded to DDR5. Two major trends in memory interconnect products: ① DDR5 memory sticks are newly designed, and the amount of chips used to support memory modules has increased significantly. ② The transmission speed of DDR5 data continues to improve. MRDIMM has been added to the server, CUDIMM/CSODIMM has been added to the PC, and the new interface chip MRCD/MDB/CKD is used.

2) From DDR4 to DDR5, the volume and price of traditional memory stick interconnect chips have risen sharply:

① Server: traditional memory stick RDIMM/LRDIMM, LRDIMD penetration rate is less than 10%. DDR4 generation RDIMM requires 1 RCD+1 SPD, LRDIMM adds 9 DBs to this, DDR5 generation RDIMM requires 1 RCD+1 SPD+1 PMIC +2 TS, LRDIMM adds 10 DBs to this, and the variety and usage of supporting chips for memory modules has increased significantly.

② PC: Desktops mainly use memory stick UDIMM. About 50% of laptop computers use onboard memory LPDDR, and 50% use memory stick SODIMM. The DDR4 generation UDIMM/SODIMM requires 1 SPD, and the DDR5 generation requires 1 SPD+1 PMIC, increasing the amount of supporting chips used in memory modules. Lanqi's products have full coverage and leading share.

3) DDR5 transmission speed has been increased, and the new module brings new opportunities for memory interface chips:

① An MRDIMM module was added to the server, which is compatible with Lanqi's new MRCD/MDB:

The DDR5 generation introduced 8800MT/s memory modules, which will use 1 MRCD+10 MDB, which is a full addition. Intel's MRDIMMCPU platform Granite Rapdis is expected to be launched in 24Q3.

Currently, MRDIMM with Lanqi's MRCD/MDB has begun large-scale trials with mainstream cloud computing/Internet vendors at home and abroad. For the first time, 2024Q1's quarterly sales exceeded 20 million yuan, and 24Q2 revenue exceeded 50 million, and revenue doubled month-on-month. Currently, only Lanqi and Renesas can supply these products globally.

② CUDIMM/CSODIMM/CAMM2 modules have been added to the PC, bringing in CKD additions:

Traditional PC memory cards UDIMM/SODIMM do not use memory interface chips for data buffering, but when the DDR5 transmission rate is 6400MT/s and above (DDR5 third generation and above), CUDIMM/CSODIMM is used, and a simplified version of the CKD memory interface chip is used. Arrow Lake, the Intel CPU platform using this product, is expected to be released on October 10 this year. Also, at the end of '23, JEDEC specified CAMM2 memory module standards. The CAMM2 can combine the high speed and low power consumption of LPDDR and the pluggable and upgradeable SODIMM; JEDEC clarified that DDR6 generation CAMM2 replaced SODIMM; the CAMM2 requires 1 SPD+1 PMIC; and the LPCAMM2 requires 1 SPD+1 PMIC.

Lanqi took the lead in testing CKD in the industry, and large-scale shipments began in 24Q2. Revenue in Q2 exceeded 10 million yuan. Currently, only Lanqi and Renesas supply CKD products.

Non-DDR5 memory stick related products: PCIe 5.0 Retimer 24 Year Fast Start.

1) PCIe 5.0 Retimer: The PCIe Retimer chip solves the signal attenuation problem. It is mainly used to interconnect the CPU with high-speed peripherals such as AI chips such as GPUs, SSD, and network cards. A mainstream AI server with a typical configuration of 8 GPUs requires 8 or 16. Mass production began in January 2023 and became the second mass production supplier in the world. 24Q1 shipped 0.15 million units, more than 1.5 times the annual shipment volume in 2023, and 0.3 million units were shipped in 24Q2. The shipment volume doubled month-on-month, and the market share increased significantly. The company's product Serdes has an advantage in self-developed. According to the company's order situation as of July 22, 2024, it is expected that orders for PCIe Retimer chips delivered in 24Q3 will be around 0.6 million, a further significant increase over the previous month.

2) CXL MXC chip: For memory expansion and memory pooling, the company launched the world's first CXL MXC chip in May 2022, leading the world in technology. In 2023, it became the world's first MXC chip manufacturer to enter the CXL compliance supplier list. In May 2023, Samsung launched the first MXC chip supporting CXL2.0 128GB DRAM, using the company's MXC chip.

Investment advice: The company is a global leader in memory interface chips. DDR5 accelerates penetration, and new products such as MRCD\ MDB\ CKD\ PCIe 5.0 Retimer\ MXC chips have opened up room for growth. In 24 years, MRCD\ MDB, CKD, and PCIe5.0 Retimer has entered the harvest period, and the company is making a big splash in the AI era as a core transportation provider. Lanqi Technology's net profit for 2024-2026 is expected to be 1.5/2.5/3.1 billion yuan, corresponding to PE valuation 41/24/19 times, maintaining a “buy” rating

Risk warning events: server and PC shipments fall short of expectations; risk that the penetration rate of MRDIMM, CUDIMM, CSODIMM, and PCI5.0 Retimer falls short of expectations; risk of memory card demand falling short of expectations due to the penetration of ARM architectures into PCs and servers; risk of deteriorating competitive landscape; risk of underlying information lag, etc.