Core views

1. 2024H1, the company achieved good growth in operating indicators such as revenue scale and profit. At the same time, due to the rapid growth of the company's business and high growth in inventory and advance payments, it reflects the company's full downstream demand and supports the continuous growth of future business performance.

2. The performance and ecology of the company's CPU products and DCU products are in a leading position in the country, and commercialization is progressing smoothly. Haiguang CPUs support not only high-end servers for complex applications such as data centers and cloud computing, but also medium- and low-end servers, workstations, and edge computing servers in informatization construction for the government, enterprise, and education sectors. Haiguang DCU has achieved large-scale applications in the fields of artificial intelligence, big data processing, commercial computing, etc., and can be used for large-scale model training and inference. Customers cover industries including “new infrastructure” of intelligent computing centers, the Internet, finance, and operators.

occurrences

The company announced financial results for the first half of 2024. With 2024H1, the company achieved operating income of 3.763 billion yuan, up 44.08% year on year; net profit to mother of 0.853 billion yuan, up 25.97% year on year; gross profit margin 63.43%, up 0.56 pct year on year. With 2024Q2, the company achieved operating income of 2.171 billion yuan, up 49.67% year on year and 36.35% month on month; net profit to mother was 0.565 billion yuan, up 28.95% year on year, up 95.77% month on month; gross profit margin was 63.83%, up 1.66 pct year on year, up 0.96 pct year on month.

Brief review

1. Rapid growth in business performance and abundant downstream demand

Based on the general computing market, the company relies on its high-end processor design capabilities, product iteration capabilities, and industry leadership capabilities to continuously improve the company's popularity and competitive advantage, and the company's operating indicators such as revenue scale and profit have achieved good growth. 2024H1, the company's operating performance maintained rapid growth, with revenue reaching 3.763 billion yuan, an increase of 44.08% year on year; net profit to mother reached 0.853 billion yuan, up 25.97% year on year. Due to the rapid growth of the company's business, the company's preparation cycle is ahead of schedule and the number of goods prepared has increased. By the end of 2024Q2, the company's inventory reached 2.455 billion yuan, an increase of 0.746 billion yuan over the end of Q1.

Meanwhile, the company's advance payment at the end of 2024Q2 reached 3.09 billion yuan, an increase of 0.476 billion yuan over the end of Q1. The increase in inventory and advance payments reflects the company's full downstream demand and supports the continued growth of future business performance.

2. The company insists on independent R&D investment. The performance and ecology of CPU products and DCU products are in a leading position in China. The company is one of the few integrated circuit design companies that also have high-end general-purpose processor and coprocessor R&D capabilities. Through high-intensity R&D investment, they enhance technological innovation capabilities and product quality, and maintain and consolidate the company's current market position and competitive advantage. With 2024H1, the company's R&D investment reached 1.372 billion yuan, accounting for 36.46% of revenue. The number of R&D technicians reached 1,855, accounting for 91.07% of the total number of employees. Most of the key R&D personnel have working backgrounds with well-known chip companies and have experience in successfully developing x86 processors or ARM processors. The company insists on independent innovation in the field of CPU and DCU chip technology, and the developed CPU products and DCU products are in a leading position in the country in terms of performance and ecology. The Haiguang CPU is compatible with mainstream international x86 processor architectures and technology routes. It has the advantages of excellent system architecture, high reliability, high security, and rich software and hardware ecology. It not only supports high-end servers for complex applications such as data centers and cloud computing, but also midrange and low-end servers, workstations, and edge computing servers in informatization construction in the fields of government, enterprise, and education. Haiguang DCU uses a “CUDA-like” general parallel computing architecture, which can be well adapted to mainstream international commercial computing software and artificial intelligence software. It has achieved large-scale applications in the fields of artificial intelligence, big data processing, commercial computing, etc., and can be used for large-scale model training and reasoning. Customers cover industries including “new infrastructure” of intelligent computing centers, the Internet, finance, and operators.

3. The company collaborates with the industrial chain to develop together to accelerate the autonomy and control of high-end processors in key domestic fields.

As a leading domestic chip design enterprise, the company maintains close ties with the upstream and downstream of the industrial chain. In terms of upstream IP, EDA design tools, chip manufacturing and packaging, the company continues to increase cooperation with upstream enterprises to promote the collaborative development of the industrial chain. In downstream clients, the company has gradually expanded well-known domestic server vendors such as Inspur, Lenovo, Xinhuasan, and Tongfang, and has developed a variety of servers based on Haiguang processors, effectively promoting the industrialization of Haiguang's high-end processors. In terms of ecological construction, the company actively integrates into open source communities at home and abroad, and actively provides adaptation and optimization solutions for Haiguang CPUs and Haiguang DCUs to the open source community, ensuring the compatibility of Haiguang high-end processors in the open source ecosystem. With the continuous advancement of innovation in information technology applications, more leading domestic enterprises are actively developing ecological construction and adaptation based on Haiguang's high-end processors, carrying out R&D, mutual certification and continuous optimization in operating systems, databases, middleware, cloud computing platform software, artificial intelligence technology frameworks and programming environments, core industry applications, etc., and have developed a number of domestic complete machine systems, basic software and application software with international influence. They have basically achieved autonomy and control in key areas of the national economy such as finance, telecommunications, transportation, etc., and initially formed a complete one based on Haiguang CPU and Haiguang DCU Domestic software and hardware ecosystem.

4. Profit prediction and investment advice

As a long-term development trend in the domestic high-end processor industry, Xinchuang and AI have broad future market space. The company is a scarce domestic enterprise with R&D capabilities for high-end general-purpose processors and coprocessors. It continues to consolidate product performance and ecological advantages through high-intensity R&D investment, and downstream demand is strong. We expect the company's revenue from 2024 to 2026 to be 9.068 billion yuan, 12.542 billion yuan, 15.087 billion yuan, and net profit to mother of 1.788 billion yuan, 2.566 billion yuan, and 3.257 billion yuan, respectively, maintaining the “buy” rating.

5. Risk warning

(1) The company's new product development progress falls short of the expected risk. If the company fails to continuously break through key technologies or performance indicators during the R&D process, the company will face the risk that early R&D investment will be difficult to recover and the expected benefits will be difficult to achieve. (2) Market competition intensifies risks. There is a large gap in the market share of domestic manufacturers compared to leading international companies, and the company faces fierce market competition in this field. In the future, if the company fails to take effective countermeasures against market competition and make up for competitive disadvantages in a timely manner, the company's competitive position, market share and business performance will be adversely affected. (3) Risk of difficulties in replacing suppliers. 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 they cannot maintain a stable cooperative relationship with them, the cost for companies to replace new suppliers is high.