Summary of the report

Event: the company announced on August 16 that the revenue in the first half of 2022 was 1.702 billion yuan (+ 50.83%), the net profit was 531 million yuan (+ 172.99%), the net profit was 519 million yuan (+ 220.88%), the gross profit was 65.00% (+ 9.77pcts), and the net profit was 31.81% (+ 13.05pcts). 2022Q2 realized revenue of 927 million (month-on-month ratio + 19.43%) and return-to-home net profit of 298 million (month-on-month ratio + 27.77%).

The product structure has been continuously optimized, and the proportion of reliable products has increased rapidly.

In the first half of 2022, in the face of the epidemic and the complex and changeable external situation, the company deployed and planned ahead of time to ensure both epidemic prevention and supply. 2022H1 continues to increase the proportion of highly reliable products, optimize the product structure, significantly improve the company's profitability, and the comprehensive gross profit margin increased by 9.77% over the same period last year.

Look at the five business lines:

① security and identification chip achieved revenue of 461 million (+ 23.57%), accounting for 27.09% of revenue (- 5.98pcts). The company's security and identification product line has three product directions: RFID and sensor chip, smart card and security chip and intelligent identification chip, which is the leading RFID in China. Chip suppliers of smart cards, security modules and NFC products. On the basis of continuing to maintain the competitive advantage of smart card chip products, it is actively expanding its product portfolio and overall solutions to perceiving RFID chips and anti-counterfeiting applications, Internet of things security, NFC applications and so on. By optimizing product performance, improving customer service, stabilizing product prices, maintaining market competitiveness, and constantly making positive progress in new areas, the sales of this category of products have increased steadily.

② non-volatile memory achieved revenue of 487 million (+ 33.80%) and revenue share of 28.61% (- 3.64pcts). Although the three main product lines NORFLASH, SLCNANDFLASH and EEPROM were adversely affected by the most magnanimous downside of the market, they were due to the continuous optimization of customer structure, the steady increase in the number of customer orders in the field of highly reliable applications, and the comprehensive anti-cyclical toughness of the entire storage product line.

③ smart meter chips achieve revenue of 276 million (+ 177.86%), accounting for 16.19% of revenue (+ 7.40pcts). The company's smart meter MCU continues to maintain a leading position in the single-phase smart meter MCU market share of the State Grid. Relying on the rich design experience and stable and reliable product realization capability accumulated in the field of smart meters, the product line has been well developed in intelligent water and gas meters, smart homes, Internet of things, car gauge-level applications and other scenarios.

④ FPGA and other chips achieved revenue of 378 million (+ 120.84%), accounting for 22.23% of revenue (+ 7.05pcts). During the reporting period, the company's FPGA products were widely used in highly reliable areas, have achieved batch applications, and the revenue share continues to increase. The research and development of a new generation of billion-door-level FPGA products is under way, and its performance will be greatly improved compared with the previous generation of products. The company's PSoC products have also been successfully mass produced, and small batch trials are being carried out at many customers. at the same time, the new generation of heterogeneous intelligent PSoC products equipped with APU, GPU, VPU, eFPGA and AI engines have also achieved phased research and development results, which will further enrich the company's programmable product family and continue to meet the needs of customers in various application fields.

⑤ testing services achieved revenue of 100 million (- 7.41%), which was affected by the 2022Q2 epidemic, resulting in a reduction in business activities. However, as the domestic economic operation continues to improve, the company continues to optimize technology and products, strengthen market development in key industries, and further enhance the market position of high-end integrated circuit testing business.

In terms of the company's high R & D investment and progress expenses for new products from multiple product lines, the company's management expenses were 60 million (+ 26.91%) in the first half of 2022, mainly due to the company's management ability and reasonable increase in employee compensation during the reporting period. 98 million (+ 35.90%) of sales expenses caused by the increase in depreciation and amortization of newly purchased office buildings The expansion of the company's business scale and the increase in personnel and wages have led to an increase in personnel costs. At the same time, a restricted stock incentive plan will be implemented, and the share payment fee will be increased. The R & D expenditure of 374 million (+ 22.15%) is mainly due to the company's reasonable salary increase in order to maintain its R & D competitiveness during the reporting period, as well as the implementation of a restricted stock incentive plan and an increase in share payment fees.

The company continues to maintain high-intensity R & D investment. From the perspective of the company's main R & D projects, R & D investment is concentrated in four areas: security identification chip, non-volatile memory, smart meter chip and FPGA chip.

① Fudan Micro Electric Security and Identification product line launched a number of Internet of things security chips to optimize the balance between security technology and low-power technology to meet the needs of low-power security applications of the Internet of things.

After the successful completion of the first Grade1-level large-capacity EEPROMAEC-Q100 examination and verification of the ② storage product line, a number of EEPROM, NOR and NAND products have entered the AEC-Q100 assessment one after another, gradually expanding the coverage of vehicle specification-level products, and providing a more complete one-stop solution for industrial control instruments, medical, communications, automotive and other application fields. The company will continue to increase R & D investment in the field of non-volatile memory with the development direction of new process nodes with low voltage or wide voltage, high speed and high reliability (extended specifications, vehicle specifications, etc.).

③ smart meter MCU products have completed the development and streaming of 12-inch 55nm and 90nm embedded flash memory process platforms, and actively promoted the production work. In the future, they will realize the complete layout of 12-inch and 8-inch process platforms, further enrich the product lineup, and expand the market share of key industries such as public utilities, industry, white goods, automobiles and so on. It is expected that a number of high-capacity, high-reliability, high-performance industrial and gauge-grade MCU products based on 12-inch process platform will be gradually launched in the second half of 2022.

④ FPGA product line has successfully broken through the key technologies such as ultra-large-scale FPGA architecture technology, programmable device compiler technology, multi-protocol ultra-high-speed serial transceiver technology, heterogeneous intelligent computing architecture technology, highly reliable programmable device technology, and ultra-large-scale programmable devices supporting full-process EDA technology. It has formed obvious technology cluster advantages in the field of FPGA and PSoC, and built core technical barriers to consolidate the competitive advantage.

In terms of cash flow, the net cash flow of the company's operating activities during the reporting period (329 million yuan, 39.61% higher than that of 2021H1) was mainly due to the increase in operating income of the company, the strengthening of loan management and the increase in payment received. The net cash flow of investment activities (- 147 million yuan, compared with 2021H1-57.69%) is mainly due to the maturity and redemption of monetary funds and transactional financial assets managed by the company, resulting in an increase in cash received from the recovered investment; the net cash flow of fund-raising (- 82 million yuan) is mainly due to the company's repayment of bank loans.

In terms of other financial data, during the reporting period, the company's inventory (1.093 billion yuan, compared with the end of last year. + 19.31%) increased rapidly, and the company's inventory was mainly chips and wafers, affected by the increasing sales competition in the chip market and the increasing shortage of production capacity of the main wafer foundry manufacturers. In order to ensure supply and demand, the company gradually expanded the inventory scale during the reporting period. Contract liabilities (304 million yuan, + 140.80% compared with the end of last year). We judge that the strong demand in the downstream application market of the company increases, some products are in short supply, and the increase of customer advance payment increases the contract liabilities. at the same time, more sufficient inventory and raw material reserves will also help the company to cope with the exuberant demand downstream.

Five major business lines, FPGA, memory business take advantage of the special field of high prosperity Dongfeng ① FPGA business: high reliable electronics field three "acceleration" driven high growth companies in the domestic FPGA chip design field is in a leading position, is the earliest domestic manufacturers to launch billion-level FPGA products. By the end of 2021, the company has cumulatively sold FPGA products based on 28nm process to more than 300 customers, including customers in communications, industrial control and highly reliable areas. According to Market Research Future's forecast, the global FPGA market space is expected to reach US $12.521 billion in 2025, of which the share of the Asia-Pacific region in the global FPGA market is expected to continue to increase to 43.94%. We believe that FPGA has a broad market space in the field of highly reliable integrated circuits. AIT (aerospace and defense, industry and testing, testing and measurement) is its largest business segment, with revenue of about $1.4 billion in fiscal 2021, accounting for 44 per cent of its revenue, according to the financial report of Cylins, the world's largest FPGA manufacturer. At present, the field of high reliable electronics in China is facing great opportunities for development, specifically manifested as three "accelerations", the first acceleration of ①: the volume of special equipment and the improvement of prosperity; the second acceleration of ②: with reference to the degree of informatization of overseas special equipment, the information content of China's special equipment is expected to continue to improve; the third acceleration of ③: under the requirement of independent control, the localization rate of electronic components and chips in special equipment continues to improve. We believe that the company's FPGA business, as the upper reaches of the special equipment industry chain, is expected to benefit from the above three "accelerations", and it is expected that the compound growth rate during the 14th five-year Plan period will be significantly higher than that of special equipment.

② security and identification chip business: the Internet of everything has put forward higher requirements for identification accuracy and security. According to Sullivan statistics, from 2014 to 2018, the number of smart card chips shipped in China increased from 3.671 billion to 6.766 billion, with a compound annual growth rate of 16.52%. The market size increased from 7.691 billion yuan to 9.591 billion yuan, and the average annual compound growth rate was 5.67%. It is estimated that by 2023, the shipments of smart card chips in China will reach 13.936 billion, and the market size will reach 12.982 billion yuan. In the future applications of the Internet of things, the security chip based on smart card chip will also be used on a large scale. In IoE applications, each item will require a unique digital ID card. Each item needs at least one security chip to complete the secure identification of its identity, the secure connection of communications and the secure storage of data. The security technology around the security chip (including security SE and security MCU, etc.) will be deeply and widely applied to the perception, network connection and application of the Internet of things. With the development of 5G technology, especially with the promotion of applications such as car networking, which pay special attention to safety, the security chip will become one of the most important modules of electronic devices.

The company's security and identification product line has three product directions: RFID and sensor chip, smart card and security chip and intelligent identification chip. It is a leading chip supplier of RFID, smart card, security module and NFC products in China. The security and identification product line shipped more than 1.5 billion chips in 2021. On the basis of maintaining the competitive advantage of traditional chip products, it is actively expanding its product portfolio and overall solutions to RFID chips and anti-counterfeiting applications, Internet of things security, NFC applications, and so on.

③ non-volatile memory business: further enhance the high-speed, low-power, low-cost, high-stability index memory chips occupy a very important position in the integrated circuit market. According to the statistics of the World Semiconductor Trade Statistics Association (WSTS), the global integrated circuit market in 2020 is US $361.226 billion, of which memory chips and logic chips are neck and neck, accounting for 32.52% and 32.78% of the market share respectively; analog chips and microprocessors account for 15.41% and 19.29% of the integrated circuit market share, respectively.

In terms of EEPROM, at present, the main process node is 0.13um, and manufacturers are also actively promoting the realization of alternative process devices below 9Xnm (non-FLOTOX), in order to achieve continuous optimization of cost and reliability. The demand for EEPROM in areas with high reliability requirements (such as variable frequency motors, Netcom equipment, instrumentation, automotive electronics, new energy systems, industrial control, etc.) will continue to increase, and product technology will gradually develop to higher reliability. In the aspect of NORFlash, it is gradually evolving to 50nm and 40nm process nodes. As the mainstream ETOX architecture evolves to the 55nm/50nm process node, the speed of subsequent iterations will gradually slow down, while new devices and architectures are still being explored, and reliability and product stability need to be strengthened. The product specification of NORFlash is gradually developing in the direction of high speed, low power consumption and high reliability. Network communication (5G base station / PON, CPE), mobile phone module (screen module, touch module, face recognition module, etc.), Internet of things IoT (WiFi, BLE, Zigbee, 4GLTE, etc.), security monitoring, wearable devices (bracelets, watches, TWS headphones) and other emerging applications are increasing and the demand is huge, which greatly increases the market capacity of NORFlash. In terms of SLCNANDFlash, after further optimization of cost and reliability, SLCNANDFlash products will enter more application fields, such as network communications, set-top boxes, wearable devices, smart homes, and the market capacity will further increase. With the rapid development of Netcom equipment, security monitoring, mobile Internet, big data, Internet of things, users put forward higher and higher requirements for the capacity of memory chips, and some areas of NANDFlash even show a trend to replace NORFlash to undertake program code storage applications.

The company's memory chips mainly focus on serial interface EEPROM, NORFlash and SLCNANDFlash products with high reliability. The technological level of this product type can be divided into two aspects: taping process level and packaging process level. In terms of the process level of taping, different memory devices are at different process nodes because of their different physical operation mechanisms and limits. In the field of EEPROM products, the mature wafer process node is 0.13um, and it has basically reached the physical performance limit of the device mechanism, which is at the same level at home and abroad. In the field of NORFLASH products, the 55nm node has entered the stage of mass production, while the 50nm-40nm node is in the development stage, and basically reaches the physical performance limit of the device mechanism, which is at the same level at home and abroad. In the field of SLCNANDFLASH products, 2Xnm is a mature process of international mainstream IDM manufacturers, and the domestic contract factory is still in the 3Xnm node. In terms of packaging technology, SOP/TSSOP/DFN and other plastic packaging forms are the mainstream packaging forms of conventional consumer industrial products. WLCSP packaging forms are widely used in volume-sensitive fields such as mobile phones and CCM modules. SIP and 3D packaging are also widely used in specific customers and specific application fields.

④ smart meter chip business: MCU chip is developing rapidly, and domestic products are developing rapidly from low-end applications to high-end applications. At the technical level, 8x32 bit occupies the mainstream, of which 8-bit has the advantages of low cost, low power consumption and easy development, while 32-bit is mainly used in middle and high-end scenarios. Take the intelligent meter MCU as an example, the current main control MCU chip generally uses a 32-bit core. With the rise of artificial intelligence and the Internet of things, the future MCU design will develop to high performance, high intelligence, and lower power consumption, more security, smaller size and integrated wireless functions, and further evolve to 64-bit MCU chips. In terms of market position, enterprises represented by Renesa Electronics and NXP occupy absolute advantages, and Chinese enterprises already have strong competitiveness in the middle and low-end market. Domestic MCU manufacturers have begun to march into automotive electronics, industrial control and other fields from the original focus on consumer electronics, especially in the field of home appliances, and have made certain achievements.

The company shipped more than 500 million MCU chips, among which the company's smart meter MCU ranks first in the market share of single-phase smart meter MCU in the State Grid, and the cumulative smart meter MCU shipments exceed 400 million, covering most watch factories in China, including Jiangsu Linyang, Weisheng Group, Hangzhou Haixing, Ningbo Samsung, Zhejiang Zhengtai, Henan Xu Ji, Hangzhou Juhua, Shenzhen Kelu, etc. Relying on the rich design experience and stable and reliable product realization ability accumulated in the field of intelligent electricity meters for many years, the company is also actively expanding to intelligent water and gas heat meters, smart home, Internet of things and other industries. The cumulative shipments of GM low-power MCU have reached 10 million, providing a new growth point for the company's future development.

⑤ testing service business: the rise of the third-party testing market in the electronic field the integrated circuit industry has entered the era of high-performance CPU, DSP and SoC, and the chip process continues to progress, gradually entering the era of 28nm, 14nm, 10nm and even 7nm. With the continuous improvement of chip complexity and performance, the technical difficulty and cost of high-end product testing and verification are getting higher and higher, which brings new development power and market space for the integrated circuit testing industry. the third-party professional testing enterprises have ushered in a good market development opportunity. At present, the scale of domestic professional testing enterprises is small, and there is a widespread lack of production capacity, which can not meet the needs of many industrial testing, and there is a huge space for development in the future. In the future, there are three main driving forces for the development of domestic professional testing: first, the incremental market brought about by upstream IC design and wafer foundry capacity expansion; second, the domestic third-party professional testing industry gradually replaces foreign testing manufacturers; third, after a clear division of labor in the domestic semiconductor industry, more designers, manufacturers and packaging manufacturers choose third-party testing. Hualing shares, a subsidiary of the company, will be listed on the North Stock Exchange. Hualing shares provide customers with integrated circuit testing solutions ranging from chip verification and analysis, wafer testing to finished product testing. The specific contents of integrated circuit testing include wafer testing and finished product testing. Hualing has established a high-grade purification test environment and a real-time online production monitoring system, with a technical R & D and service area of 9000 square meters. The test capability widely covers many product areas, such as mobile intelligent terminal, information security, digital communications, FPGA, CIS, financial IC card automotive electronics, Internet of things IoT devices, MEMS devices, 3D high-density devices, new materials and new structures, etc.

Implement equity incentive to stimulate the long-term development vitality of the company

The company implemented the equity incentive plan in 2021, and on December 6, 2021, the company held the 30th meeting of the eighth session of the Board of Directors and the 12th meeting of the eighth Board of Supervisors to consider and pass the "Bill on granting restricted shares to incentive targets for the first time". It is determined that 8.934 million Class II restricted shares will be granted to 565 incentive subjects for the first time at a price of RMB18.00 per share. In order to meet the performance evaluation requirements, the growth rate of business income in 2021-2024 is not less than 40%, 65%, 90%, 120%, or the gross profit of sales in 2021-2024 is not less than 50%, not less than that in 2020. One of the two goals. The amortization expenses of the company from 2021 to 2025 were 17 million yuan, 147 million yuan, 78 million yuan, 42 million yuan and 17 million yuan respectively.

We believe that by carrying out the equity incentive plan, through the binding of the interests of employees and executives with the interests of the company, it will help the company to enhance employee cohesion, team stability, and effectively stimulate the enthusiasm of the management team. so as to improve business efficiency, reduce agent costs, and have a positive impact on the company's long-term business performance and intrinsic value.

Investment suggestion

Based on the above point of view, we estimate that the operating income of the company from 2022 to 2024 will be 3.892 billion yuan, 4.865 billion yuan and 5.838 billion yuan respectively, the net profit will be 984 million yuan, 1.287 billion yuan and 1.558 billion yuan respectively, and the EPS will be 1.21,1.58,1.91 yuan respectively, corresponding to the closing price of 64.16yuan on August 15th, and 53.09,40.60,33.54 times of PE in 2022-2024. If the amortization expense of equity incentive is converted back, the net profit from 2022 to 2024 is 1.131 billion yuan, 1.365 billion yuan and 1.6 billion yuan respectively, and the EPS is 1.39,1.67,1.96 yuan respectively, and the corresponding PE is 46.21,38.28,32.66 times respectively. Based on the company's position in the industry and the future development prospects of the products, we maintain the "buy" rating and raise the target price by 75.00 yuan, corresponding to 62.06,47.46,39.21 times of PE from 2022 to 2024, respectively.

Risk hint

There are still uncertainties in the development of the global epidemic; the risk of IC price reduction, the lower-than-expected risk of product research and development, and the lower-than-expected risk of market development.