Event: Cambrian releases its 2024 semi-annual report. The company's 2024H1 achieved operating income of 64.7653 million yuan, a year-on-year decrease of -43.42%; net profit to mother was 0.53 billion yuan, and losses narrowed 2.7% year over year; after deducting non-return net profit of 0.609 billion yuan, losses narrowed 4.98% year on year.

Comment:

The company's losses have narrowed and gross margin has increased. The company's revenue declined in the first half of the year due to the supply chain and shipping pace, but in terms of profit, losses narrowed year-on-year. 2Q24 achieved revenue of 39.0992 million yuan, a year-on-year decrease of 0.21% and a month-on-month increase of 52.3%; net profit to mother was -0.303 billion yuan. The company's Q2 gross margin was 66.08%, up 6.62 pct year on year and 8.47 pct month on month.

Invest actively in R&D to promote the construction of a software and hardware ecosystem in all aspects. In the first half of the year, the company generated R&D expenses of 0.447 billion yuan, a year-on-year decrease of 7.27%, and the R&D expenditure rate reached 690.92%. The number of R&D personnel is 727, accounting for 74.79% of the total number. In terms of hardware, the company is making every effort to promote the development of next-generation intelligent processor microarchitectures and instruction sets. In terms of software, the company has also optimized and iterated the basic software system platform. Among them, in terms of training software platforms, the company has vigorously promoted the adaptation and optimization of large-scale model services; in terms of inference software platforms, the company has made certain progress in AIGC business adaptation, open source ecosystem construction, and ease of use, laying the foundation for large-scale promotion of chip products.

Inventory and prepayments continue to grow, and AI chip products will be delivered in batches in the second half of the year. By the end of the second quarter, the company's inventory was 0.235 billion yuan, an increase of 136.85% over the end of the previous year and an increase of 82% over Q1, mainly due to an increase in stocks of raw materials. Advance payments were $0.55 billion, up 272.17% from the end of the previous year and 168% higher than Q1. We believe that the sharp increase in inventory and advance payments reflects the company's active upstream procurement and preparation. The main reason for this is that the company Q2 actively tests the latest AI chip products to the Internet and large model manufacturers, and the test results have been recognized and are expected to be converted into orders.

During the reporting period, the company's products were shipped in batches in natural language application scenarios; the actual measurement capabilities and iterative expectations of current chip products all met customer needs. It is expected that batch delivery of AI chip products in the second half of the year will be a strong support for full-year performance growth.

Investment advice: We expect the company to achieve revenue of 1.39/2.21/3.31 billion yuan in 2024-2026, an increase of 96%/59%/50% year-on-year, and the corresponding PS is 76x/48x/32x, respectively. Considering the scarcity and high growth potential of the company on the AI chip circuit, it was given an “gain” rating.

Risk warning: risk of not being profitable; risk of product development falling short of expectations; risk of insufficient supply chain stability.