The company's profit forecast was adjusted to reaffirm Wingtech's “buy” rating: due to price increases in the mobile phone supply chain and the decline in overseas power semiconductor cycles, Wingtech's profit for the fourth quarter and first quarter of last year declined compared to the same period. In the short term, Wingtech's ODM business is improving quarter by quarter, and Anshi Semiconductor's business is about to bottom out. In the medium to long term, large customers are expected to provide growth and profit for Wingtech's ODM business, while the Lingang fab is expected to drive the growth of Anshi's consumer applications. Maintain a “buy” rating.
The ODM business is strengthening cost control, and major customers will also steadily reverse losses: Wingtech ODM recorded losses of RMB 700 million and RMB 350 million in the fourth quarter of last year and the first quarter of this year, respectively. The main reasons are: 1) price increases in the mobile phone supply chain, causing some projects to shift from profit to loss; 2) manufacturing costs are at a high level, affecting profit margins; 3) major customer projects are still in the early stages, leading to losses. Looking ahead to the second quarter and the second half of this year, through multiple supply chain layouts and strengthening manufacturing cost control, Wingtech is expected to gradually improve the profitability of the mobile ODM business. At the same time, the continued volume of major customer projects is expected to drive major customer projects to continue to improve the break-even point. As a result, we expect that Wingtech's ODM business will be trending upward this year.
Anshi Semiconductor is under downward pressure from overseas power semiconductor cycles, and the downward cycle is about to bottom out.
Anshi Semiconductor's gross margin for the fourth quarter of last year and the first quarter of this year was 33.8% and 31.0%, respectively, down from the 37.7%-41.7% range in the first three quarters of last year. This is mainly affected by the downturn in the overseas power industry cycle and the removal of automotive semiconductors from inventory. We expect overseas automotive semiconductor inventories to return to normal levels in the second quarter of this year. Referring to the low gross margin of 27.2% in 2020 in the previous cycle, we believe that Anshi has limited downside in this downward cycle. We expect that Anshi Semiconductor is already in the process of bottoming out. From a medium- to long-term perspective, the Lingang fab is expected to take on the manufacture of products consumed by Anshi, provide more cost competitive products, and seize domestic market share.
Valuation: Combined with Wingtech's 4Q23 and 1Q24 results, we lowered Wingtech's 2024 performance forecast, with an estimated profit of RMB 1.47 billion in 2024. Meanwhile, we adjusted our target price to RMB 37.1, a potential increase of 17%, corresponding to our 2024 target price-earnings ratio of 31.5x.
Investment risk: Demand recovery for consumer electronics products such as smartphones fell short of expectations, and growth was weak in the second half of the year. The semiconductor industry is removing inventory more slowly than expected. Growth in the domestic or overseas NEV industry was weaker than expected. Competition in the industry is once again intensifying, and players' profit margins are under pressure.