Storage prices picked up, and the company's net profit in the first quarter increased nearly 6 times month-on-month. The company mainly uses storage particles as raw materials to develop storage module products. The products include embedded storage, solid state drives (SSD), memory sticks, and mobile storage (USB drives, memory cards). Affected by market weakness, the operating profit of each storage granule factory fell into a negative range in the 23rd half of the year. As upstream manufacturers continued to cut production and supply contraction, storage prices picked up significantly in 4Q23, and price increases continued in 1Q24. Against this background, the company's 4Q23 achieved revenue of 3.55 billion yuan (YoY +108.3%, QoQ +23.5%), net profit margin of 55 million yuan (YoY +140%, QoQ +119%), gross profit margin 18.5% (YoY+18.1pct, QoQ+13.6pct)); 1Q24 Achieved revenue of 4.45 billion yuan (YoY +200.5%, QoQ +25.6%), net profit to mother of 384 million yuan (YoY +237%, QoQ +598%), and gross profit margin of 24.4% (YoY+23.1pct, QoQ+5.9pct).
The storage market is expected to grow by 45% in 24 under the effects of production cuts, and the company will benefit significantly. The storage module process mainly involves purchasing storage particles to package the wafer design as a memory product. Storage particles account for about 80% of the product cost, and price fluctuations of storage wafers directly affect the company's profit level. The downward cycle of the storage industry continued from '22 to the third quarter of '23, and storage manufacturers collectively lost money. In this context, the original factory continued to take measures to cut production, compounded the recovery in demand, and 4Q23 storage prices entered an upward channel; according to WSTS forecasts, the global storage market size will grow 45% year on year in '24, and the company will benefit as a midstream manufacturer.
The consumer storage business bucked the trend, and enterprise-grade storage gradually took off. The consumer storage brand LEXAR, which was acquired by the company in '17, bucked the trend by 59% in annual revenue and grew 99.8% year-on-year in 1Q24, achieving complete global channel coverage. At present, the company's NVMe SSD and SATA SSD product lines have been adapted for compatibility with servers on many mainstream domestic CPU platforms such as Kunpeng, Haiguang, Dragon Core, Feiteng, Megaxin, and Shenwei.
Enterprise-grade SSDs have been mass-produced and shipped, and are widely used in various industries such as the core business systems of telecom operators, the core business systems of related bank customers, and large Internet platform enterprises.
Build independent sealing and testing capabilities, and have a comprehensive layout of business units. In order to deepen the cooperation mechanism with the original manufacturer, the company acquired Yuancheng Suzhou to complete the sealing and testing capabilities of the high-end product line; acquired the Brazilian storage brand Zilia to further open up the global market; in addition, the company's self-developed main control chips and small-capacity memory chips have improved product capabilities to reduce costs; and finally built the ability to provide customized storage solutions for major customers, transforming and upgrading from the traditional module production model to the TCM (Technology Contract Manufacturing) cooperation model.
Investment advice: Since the increase in storage prices was much higher than our previous expectations, the company's inventory supplement was higher than the previous forecast. Based on the company's operating conditions in the first quarter of '23 and '24, the net profit forecast for 24-25 is estimated to be 15.2/11.8/1,041 million yuan (previous value: 298/491 million yuan), corresponding to the share price PE on April 26, 2024, 27/34/39 times, respectively, maintaining the “increase in holdings” rating.
Risk warning: Demand in the storage industry falls short of expectations, new product releases fall short of expectations, etc.