Incident: On the evening of April 24, the company released the “2023 Annual Report” and the “2024 First Quarter Report”. In 2023, the company achieved revenue of 1,037 million yuan, an increase of 35.17%; in 2024, the company achieved revenue of 255 million yuan, a year-on-year decrease of 13.61%, and a year-on-year increase of 58.80%.
The quarterly report exceeded expectations, and product recognition continued to increase. In 2023, the company achieved operating income of 1,037 billion yuan, a year-on-year increase of 35.17%; achieved net profit attributable to mother of -20 million yuan, a year-on-year increase of 33.62%; realized net profit withheld of -67 million yuan, an increase of 5.78% over the previous year; and achieved an EBITDA of 83 million yuan, an increase of 36.59% over the previous year. The company's revenue growth in 2023 was mainly due to increased customer recognition of the company's brand, cooperation between the two parties continued to deepen, and product application was further expanded. As the company continued to increase investment in R&D, net profit was still negative, and the increase in net profit was mainly affected by changes in operating income amount and changes in R&D expenses.
Looking at a single quarter, 2023Q4 achieved operating income of 160 million yuan, a year-on-year decrease of 25.45% (Q1/Q2/Q3 increased 106.30%/66.90%/16.43% year-on-year, respectively); realized net profit to mother of -63 million yuan (Q1/Q2/Q3 increased -0.22%/599.40%/163.95%, respectively), a year-on-year decrease of 120.31%, and realized net profit without return to mother of 79 million yuan, a year-on-year decrease of 53.82%. The decline in Q4 revenue in 2023 is mainly due to increased concerns from downstream customers about the uncertainty of upstream capacity supply in the first quarter of 2023. Some customers increased their pick-up efforts in the first half of 2023, which led to large fluctuations in Q4 revenue in 2023.
In Q1 2024, the company achieved revenue of 255 million yuan. The company's revenue for the first quarter of 2024 decreased by 13.61% compared to the first quarter of 2023, but increased by 58.80% compared to the fourth quarter of 2023.
Since the first quarter of 2023, downstream customers have intensified their concerns about the uncertainty of upstream capacity supply. As a result, some customers have increased their pick-up efforts in the first half of 2023, and operating income in the first and second quarters of 2023 has increased volatility. As the company establishes a long-term order mechanism upstream and downstream of the industrial chain and guarantees customer confidence through continuous and stable delivery, abnormal fluctuations have gradually been eliminated since 2024. The 24Q1 performance declined by 138.73% year-on-year, mainly due to the demand from downstream customers for the company to improve product performance and the richness of specifications, and seize the development opportunities brought about by the current trend of localization. The company increased investment in R&D of new products, putting pressure on profit performance. As the company's overall loss situation increased, the company's losses in various earnings per share indicators also increased year-on-year.
Focus on core business, and the share of Ethernet switching chips in revenue continues to increase.
1) By product: In 2023, the company achieved revenue of 792 million yuan, 151 million yuan, 90 million yuan and 05 billion yuan respectively, with year-on-year increases of 60.58%, 1.78%, -20.30%, and -61.37%, respectively, accounting for 76.30%, 14.52%, 8.67% and 0.51% of revenue, respectively.
2) By region: The company's domestic and overseas revenue in 2023 was 734 million yuan and 303 million yuan respectively, up 28.38% and 55.00% year-on-year respectively, accounting for 70.75% and 29.25% of revenue respectively.
3) By sales model: The revenue of the company's direct sales and distribution regions in 2023 was 193 million yuan and 844 million yuan respectively, up -22.60% and 63.06% year-on-year respectively, accounting for 18.65% and 81.35% of revenue respectively.
The change in gross margin is a structural change due to an increase in the share of revenue from chip products. In 2023, the company achieved a gross margin level of 36.26%, a year-on-year decrease of 6.90pct, and achieved a net interest rate level of -1.88%, an increase of 1.95pct year-on-year. In 2024, the company achieved gross profit margin and net profit margin levels of 37.94% and -2.39%, an increase of 7.30 pct and a decrease of 7.71 pct year-on-year.
Expenses have declined during this period, and R&D growth has helped product expansion. In 2023, the company's four expenses rate was 41.91%, a year-on-year decrease of 9.31pct, of which:
Sales expenses increased 15.61% year on year, sales expense ratio decreased by 0.66 pct year on year; management expenses increased 20.14% year on year, management expenses rate 5.46%, decreased 0.68 pct year on year; R&D expenses increased 19.00% year on year, R&D expenses rate decreased by 4.11 pct year on year; the company plans to launch high-performance switching chips for large-scale data centers, switching capacity and port rates that have basically reached the level of leading competitors in 2024. It is expected that R&D expenses will increase. This chip is equipped with advanced features such as enhanced secure interconnection, enhanced visualization, and programmability, which will further reduce the gap between China's Ethernet switching chip industry and the international advanced level.
Financial expenses were reduced by 49.60% year on year, and the financial expense ratio was 2.29%, down 3.86 pct year on year. The main reason was that in 2023, the company adjusted its foreign currency borrowing strategy to reduce losses due to exchange rate fluctuations. As exchange rate fluctuations slowed down, the company's financial expenses declined year on year.
The net cash flow from the company's 2023 operating activities was -263 million yuan, down 137.49% from the previous year. Mainly in response to the increase in sales demand and the demand from downstream customers for the company's long-term stable supply, the company increased its inventory scale and increased production capacity reservations for suppliers, thereby greatly increasing the product purchases and advance payments made by the company to suppliers in the current period. The net cash flow from investment activities was -657 million yuan, a year-on-year decrease of 303.15%, mainly due to the company's large expenditure on purchasing structured deposits with idle capital to improve the efficiency of capital use. The net cash flow from fund-raising activities was 1,582 billion yuan, an increase of 530.53% over the previous year, mainly due to the company's initial public offering of RMB common shares and the successful receipt of funds raised on the Science and Technology Innovation Board.
Investment advice: Scarce leading switching chip companies may drive the AIGC era with the Arctic series.
The company's middle- and low-end product lines have a stable foundation. High-end products are being developed and are expected to enter leading overseas monopoly markets, be rooted in China, have localization advantages, and actively promote supply chain innovation. The company is expected to achieve net profit attributable to mother in 2024-2026 - 102 million yuan, 45 million yuan and 185 million yuan, maintaining the “increase in holdings” rating.
Risk warning: risk of product development falling short of expectations; risk of loss of intellectual property rights and core technical personnel; risk of trade friction.