2023 and 1Q24 results fell short of our expectations
Nanochip announced 2023 and 1Q24 results: due to weak downstream demand, the company achieved operating income of 1.31 billion yuan, a decrease of 21.52% year on year, net profit to mother - 310 million yuan, a decrease of 221.85% year on year, gross margin decreased 11.42 pcts year on year to 38.59% year on year; 1Q24 achieved operating income of 362 million yuan, a decrease of 23.04% year on year; net profit to mother - 150 million yuan, decrease of 152 million yuan year on year; gross profit margin of 32.0% year on year, year on year The decline was 13.31 pcts. Affected by weak demand and increased market competition, the company's overall performance fell short of our expectations.
Development trends
Due to weak downstream demand and market competition, annual and quarterly profits declined year-on-year. In 2023, demand in the downstream automotive electronics sector increased, and the consumer electronics sector improved, but the industrial, photovoltaic and energy storage markets were still in the inventory removal stage; under the combined influence, the company's revenue declined year on year; in addition, due to the effects of increased R&D expenses and employee equity expenses in 2023, net profit to mother fell 221.85% year on year to -310 million yuan. 1Q24's net profit to mother was 150 million yuan, a year-on-year decrease of 152 million yuan. We expect the company's revenue to continue to recover as downstream demand recovers and inventory continues to be removed.
The product plan focuses on booming fields such as automobiles, and continues to enrich the categories. According to the company's announcement, the company has now been able to provide more than 1,800 products. We believe that in 2024, the company is expected to continue to expand its product layout. Among them, the sensor side is expected to focus on developing magnetic sensors, pressure sensors, and temperature and humidity sensors; in terms of signal chains, the company will successively launch new isolators such as isolated comparators and capacitive isolated solid state relays; in terms of power drives, we think the company is expected to continue expanding products such as automobile motors and motor drives. We expect that as demand in the downstream automotive sector recovers, the company's multi-dimensional layout of automotive products will boost revenue growth.
R&D investment continues to grow at a high rate, and continues to broaden overseas markets to build a competitive advantage. In 2023, the company's R&D expenses were 522 million yuan, an increase of 29.17% year-on-year. 1Q24's R&D expenses were 152 million yuan, a year-on-year decrease of 4.41%. According to the company announcement, the company's R&D personnel increased by 30.06% year-on-year to 424 in 2023. Furthermore, the company continues to operate key overseas markets such as Europe, Japan, and Korea. Use global resources to provide localized services to overseas customers. We believe that the company's high investment in R&D is expected to help expand its product line, and the development of overseas customers is expected to strengthen the company's global presence in booming fields such as automobiles.
Profit forecasting and valuation
Considering the recovery in demand and the progress of inventory removal, compounded by increased market competition and pressure on company prices, we lowered the company's 2024 revenue/net profit forecast of RMB 0.42/191 million to RMB 1,785/-155 million yuan, maintained the company's 2025 revenue forecast, and lowered the company's 2025 net profit forecast by 49.4% to RMB 118 million to maintain the outperforming industry rating. We used the 2027E forward valuation. Referring to the average valuation of comparable companies, we gave the company 40x 2027E P/E. We lowered the company's target price by 16.4% to 120.07 yuan. The current stock price corresponds to 31.7x P/E in 2027, and the target share price has 26.3% upside compared to the current stock price.
risks
Product development falls short of expectations; domestic substitution falls short of expectations; industry competition intensifies.