Domestic computing power base promotes artificial intelligence to enable industrial upgrading. Cambrian was founded in 2016. It focuses on the development and technological innovation of artificial intelligence chip products, and strives to build core processor chips in the field of artificial intelligence. Cambrian provides a series of smart chip products and platform-based system software with cloud-edge integration, software and hardware collaboration, training and reasoning integration, and a unified ecosystem. Cambrian products are widely used by server manufacturers and industrial companies to provide sufficient computing power for complex AI application scenarios in the fields of the Internet, finance, transportation, energy, electricity, and manufacturing, and promote the upgrading of the AI-enabled industry.

The development of domestic computing power is just right, and high-quality computing power manufacturers have benefited significantly. Since ChatGPT continued to explode in 2022, global technology leaders have dramatically increased their investment in computing power, kicking off this round of major global computing power growth. Looking back at the current point, training-side investment is still expanding. The number of parameters for GPT3.5 and GPT4 and O1 may reach the 10 trillion level; the cost of Microsoft's “Stargate” project is expected to exceed 100 billion US dollars. Furthermore, the recently released OpenAI o1 shows that “scaling-law” is also established on the reasoning side, that is, the inference effect will improve with more reinforcement learning and more time to think, and the space required for inference is expected to rise again. The US continues to restrict the import of high-end AI chips from China, forcing domestic chips to accelerate development. As far as domestic computing power is concerned, in the first half of 2024, Beijing, Shanghai and other places all announced intelligent computing construction plans, and their computing power centers are being implemented at an accelerated pace. Localization requirements in some regions will reach 50% in 2025 and 100% in 2027. Large operator orders may also verify the continued penetration of localization. Cambrian can provide a full range of smart chips and processor products for the cloud, edge, and terminals. It is also one of the few domestic companies with complex chip design experience under advanced integrated circuit technology (such as 7nm), and is expected to fully benefit from this round of domestic computing power construction.

The current Cambrian period: similar to Oriental Wealth 2013-2015. Cash purchased goods and received labor payments during the 24Q2 and 24Q3 Cambrian period was 0.614 billion and 1,128 billion, respectively, up 1077% and 588% year-on-year, respectively. The company's payments in a single quarter of 24Q3 now reached record highs. In terms of inventory, the company's inventory at the end of 24Q3 was 1.015 billion, a record high since the company went public. We believe that the current Cambrian period is similar to Dongfang Wealth in 2013-2015. Dongfang Wealth's revenue in 2015 increased 10.8 times compared to 2013, and its peak market capitalization increased 15.88 times compared to the beginning of 2014. Dongfang Wealth became the protagonist of the 2013-2015 Internet finance wave. Under the current wave of AI, Cambrian's revenue has now been initially increased, and forecasting revenue indicators such as inventory and cash payments are performing well. We believe that the company is about to enter a rapid revenue volume cycle. As the pearl of domestic AI chips, Cambrian is expected to become the protagonist of this AI wave.

First coverage, giving the company a “buy” rating. We expect Cambrian to be in the early stages of rapid revenue growth. We expect revenue for 2024-2026 to be 1.707/4.975/6.448 billion yuan, net profit to mother of -0.512/0.208/0.751 billion yuan, respectively, and corresponding EPS of -1.23/0.50/1.80 yuan, respectively. We selected Haiguang Information and Longxin Zhongke, which are also domestic chip companies, as comparable companies. Combined with the comparable company's average PS of 40x in 2025, we consider that the company is currently in the revenue breakthrough stage to give the company an appropriate premium, give the company a 50x target PS in 2025, corresponding to a target market value of 248.8 billion yuan, and give it a “buy” rating for the first time.

Risk warning: Production capacity supply falls short of expectations, downstream customer demand falls short of expectations, industry competition intensifies, etc.