Industrial lines have developed in multiple dimensions, and losses have narrowed in the short term

The company's main business is the R&D, design and sale of artificial intelligence core chips used in various cloud servers, edge computing devices, and terminal devices, as well as providing customers with rich chip products. Currently, the company's main product lines include cloud product lines, edge product lines, IP licensing, and software. In 2023, the company achieved operating income of 709.3866 million yuan, net profit to mother of 848.4401 million yuan, and the revenue of the company's intelligent computing cluster system/cloud product line/edge product line was 604.5327 million/90.5651 million/10.8245 million yuan respectively, accounting for 85.22%/12.77%/1.53% of revenue.

Revenue for the first quarter of 2024 was 25.6661 million yuan, down -65.91% year on year. Net profit to mother and net profit after deducting non-net profit were about -226.6773 million/ -261.1381 million yuan respectively, narrowing the year-on-year loss by 11.12%/13.52%. The decline in revenue was affected by the supply chain.

The company's intelligent computing cluster system business combines the company's self-developed acceleration cards or training machine products with servers provided by partners. Data center clusters are combined with equipment, network equipment, and storage devices, and equipped with the company's cluster management software to provide overall software and hardware solutions for customers with relatively weak technical ability to deploy artificial intelligence applications. The cloud product line currently includes cloud-based smart chips, accelerators, and training machines. Among them, cloud-based smart chips and acceleration cards are core devices for artificial intelligence processing in cloud servers, data centers, etc. Edge computing in the company's edge product line is a new computing paradigm that has emerged in recent years. Devices between terminals and the cloud are equipped with moderate computing power.

On July 18, 2024, Chen Tianshi, the chairman of the company, offered to use the company's own funds to repurchase the company's shares through centralized bidding transactions for employee stock ownership plans or share incentives. The repurchase price was not more than RMB 297.77 per share, and the total repurchase capital was not less than RMB 20 million and not more than RMB 40 million. The move will motivate management and employees and further boost investor confidence.

Breakthrough in chip technology innovation. Since the establishment of a large-scale project with China Mobile in March 2016, the company has rapidly achieved the industrialization of technology. The product system that the company has launched covers cloud-based and edge-end smart chips, accelerator cards, and terminal intelligent processor IPs, which can meet the needs of artificial intelligence computing of different scales in the cloud, edge, and end. The company has successively launched Cambrian 1A, Cambrian 1H, and Cambrian 1M series intelligent processors for terminal scenarios; cloud-based smart accelerator card series products based on Siyuan 100, Siyuan 270, Siyuan 290 chips, and Siyuan 370; and edge intelligent accelerator cards based on Siyuan 220 chips. Among them, Cambrian intelligent processor IP products have been integrated into more than 0.1 billion smartphones and other smart terminal devices, and Siyuan series products have also been used in the products of many server manufacturers such as Inspur and Lenovo. Since its release, Siyuan 220's cumulative sales have surpassed one million units.

Among the company's core processors and chips, the Cambrian 1A processor is the world's first commercial terminal intelligent processor IP product, and the Siyuan 100 (MLU100) chip is the first peak cloud smart chip in China. The Siyuan 290 (MLU290) chip is the first cloud-based training smart chip in the Cambrian period. It uses a 7nm process. Under 4-bit and 8-bit fixed-point computation, the theoretical peak values are as high as 1024 TOPS and 512 TOPS, respectively. The Siyuan 370 (MLU370) chip is the first Cambrian artificial intelligence chip using Chiplet (core) technology. It has twice the computing power of Siyuan 270, a second-generation Cambrian cloud inference product.

The company's intelligent computing cluster system business is developing steadily. In August 2023, the company formed a consortium with China Mobile Communications Group Zhejiang Co., Ltd. Taizhou Branch and Zhejiang Public Information Industry Co., Ltd. to participate in the bidding for the “Southeast Zhejiang Digital Economy Industrial Park Digital Infrastructure Upgrade Project (Phase I)”. The contract amount was 753.0818 million yuan. The company, as the leader of the consortium, is responsible for the supply, installation and follow-up services of the intelligent computing hardware part. The amount of the company was 528.0923 million yuan, and the contract was completed.

In the field of visual models, the company and Zhixiang Future have reached cooperation on computing power products and deep adaptation of visual multi-modal models. Cambrian products provide computing power guarantees for their online commercial applications. In the field of large language models, the company's products have been adapted to large models with leading customers such as Baichuan Intelligence, and have obtained product compatibility certification, and product performance has also reached the level of mainstream international products. In the financial sector, the company and many large banks have tested large language models and are promoting the implementation of applications in the financial field. Currently, Bank of Communications has selected the GPU server embedded in the company's smart accelerator card as the designated model.

The market size is expanding rapidly, and the Gartner report predicts that the global artificial intelligence chip market will reach 53 billion US dollars in 2023, and is expected to grow to 67.1 billion US dollars in 2024. By 2027, the market is expected to be more than double the size of 2023, reaching $119.4 billion. According to the “2023-2024 China Artificial Intelligence Computing Power Development Assessment Report”, China's intelligent computing power will reach 259.9 billion floating point operations per second (EFLOPS) in 2022, 414.1 EFLOPS in 2023, and is expected to reach 1117.4 EFLOPS by 2027, with a compound annual growth rate of 33.9%. The growth of global edge AI infrastructure processors and accelerators will increase from $1.1 billion in 2022 to $9.4 billion in 2027, with a compound annual growth rate of 52.3%.

In October 2023, the Ministry of Industry and Information Technology and 6 other departments jointly issued the “Action Plan for the High-Quality Development of Computing Power Infrastructure” document, which proposed that “by 2025, in terms of computing power, the computing power scale will exceed 300 EFLOPS, accounting for 35% of intelligent computing power.” In July 2024, the “Notice on Implementing a Special Guarantee Plan to Support Science and Technology Innovation” proposed increasing risk sharing and compensation for science and technology innovation SMEs. For technology-based SMEs and innovative SMEs, financing funds share risk liability of up to 30%.

Facing the rapid development of the AI industry, domestic operators, Internet cloud vendors, etc. are also actively deploying. Since this year, the three major operators have launched a total of 31 billion yuan of AI server collection, and the degree of localization has increased dramatically. Among them, China Mobile plans to invest 47.5 billion yuan in computing power in 2024, forming 10.1 EFLOPS intelligent computing power, and plans to achieve an intelligent computing power greater than 17 EFLOPS by the end of 2024.

It is expected that domestic computing power will be replaced and accelerated in key industries, and the company will greatly benefit from the rapid expansion of domestic computing power.

Profit forecasting

We are optimistic that as one of the few domestic enterprises with advanced integrated circuit technology and complex chip design experience, the company's leading position in the software and information technology service industry, comprehensive technical layout in the field of chips and intelligent computing clusters, and steady improvement in performance. The company's revenue for 2024-2026 is 1.404, 2.24, and 3.435 billion yuan, respectively, and EPS is -1.21, -0.5, and 0.33 yuan respectively. The PE corresponding to the current stock price is -213.2, -519.6, and 781.7 times, respectively. This is the first coverage, giving it a “buy” investment rating.

Risk warning

(1) Management risks brought about by rising labor costs and continued expansion of scale in the software and information technology service industry; (2) technological innovation risks brought about by maintaining and enhancing the company's competitiveness; (3) risk of customer concentration due to large revenue share and business stickiness of major customers; (4) risk of changes in tax incentives and government subsidy policies; (5) risk that employee stock ownership plans/equity incentives are progressing less than expected.