Matters:

The company released the 2024 annual report:

1) In 2024: the company achieved operating income of 3.590 billion yuan, a year-on-year increase of +1.53%; The gross profit margin was 55.95%, a year-on-year increase of -5.26pct, and the net profit attributable to the parent company was 573 million yuan, a year-on-year increase of -20.42%; net profit attributable to the parent company after deducting non-profits was 464 million yuan, a year-on-year increase of -18.92%;

2) 2024Q4: The company achieved operating income of 907 million yuan, +13.57%/+1.91% year-on-year/month-on-month; gross margin was 58.60%, +8.94pct/+6.46pct year-on-year/month-on-month; net profit attributable to the parent company was 145 million yuan, +109.59%/+83.65% year-on-year/month-on-month; The net profit attributable to the parent company after deducting non-profits was 79 million yuan, +356.24%/+4.81% year-on-year/month-on-month.

Comments:

Market competition intensified, performance was under pressure in the short term, and profitability was restored in 24Q4. Affected by factors such as the economic environment, consumer demand, and industry cycles, the semiconductor industry is hovering at the bottom but showing signs of stabilization. The company is facing fierce market competition in various product lines, the company actively expands new products and new markets, and adjusts the sales price of some products in a timely manner according to the market situation to consolidate or expand market share, and the sales volume and operating income have increased. At the same time, the comprehensive gross profit margin of products decreased by 5.26 percentage points from the previous year due to the price of some product lines, and the net profit was further pressured by the impact of credit impairment and asset impairment provisions. From 24Q4, the profit inflection point appeared, with the gross profit margin rebounding to 58.60% in a single quarter (+6.46pct quarter-on-quarter), and the net profit attributable to the parent company was 145 million yuan (+109.59% year-on-year, +83.65% month-on-month). Looking forward to 2025, we expect that the industrialization progress of high-end FPGA and intelligent SoC platforms may become key variables for the company's business development.

The company's highly reliable business has significant technological leadership, and product differentiation maintains strong demand. As one of the leading enterprises of FPGA series products in China, the company has tens of thousands of gate FPGA, 100 million gate FPGA, billion gate and PSoC four series of dozens of products, with the whole process of independent intellectual property rights FPGA supporting EDA tool ProciseTM, is a leading supplier of programmable device chips in China. The company is promoting a new generation of FPGAs and intelligent reconfigurable SoCs based on the advanced process of 1xnmFinFET, and has completed sample testing, has been sold in small batches for some imported customers, and has simultaneously carried out yield improvement work, and product pedigree work is also advancing. The company's PSoC products integrate FPGA, DSP, GPU, ASIC and other functions, and develop in the direction of high-performance heterogeneous hardware and unified open software, which can deeply support complex logic, motion control, image processing, artificial intelligence and other integrated applications. PSoC products based on 28nm process are currently relatively mature and selling well. PSoC products for the next-generation process are already available in small batches for customer validation. Under the technical advantages, the company continues to benefit from the trend of localization, and the gradual introduction of new products will provide the company with continuous growth momentum.

The recovery of the industry cycle and the breakthrough of high-end scenarios are expected to return to the growth track of the civilian business. Since the second half of 2022, the company's MCU and non-volatile memory businesses have faced great pressure, and the pressure on the civilian business has had a significant impact on the company's short-term performance. In 2024, the security and identification chip/smart meter chip/integrated circuit testing service business will achieve revenue of 7.91/3.97/130 million yuan, respectively, a year-on-year increase of -8.31%/+44.90%/-29.59%. Due to the growth of electricity meter bidding of the State Grid and China Southern Power Grid, and the boost in overseas meter demand, the sales of smart meter MCUs have rebounded significantly, and the MCU business has taken the lead in repairing. The three major product lines of security and identification chips, non-volatile memory and MCU have some part numbers cut into the field of automotive electronics, and with the continuous optimization and upgrading of product structure and customer structure, the future performance growth is worth looking forward to.

Investment suggestion: As a veteran IC design company, the company continues to benefit from domestic substitution opportunities, and FPGA has entered the harvest period. Considering that the recovery of downstream demand is less than expected, we will lower the company's 2025-2026 net profit attributable to the parent company forecast from 10.57/1.270 billion yuan to 805/990 million yuan, corresponding to EPS of 0.98/1.21 yuan, and the new net profit attributable to the parent company in 2027 is forecast to be 1.178 billion yuan, corresponding to EPS of 1.43 yuan. Referring to the valuation of comparable companies in the industry and their own performance growth, we give the company 60 times PE in 2025, corresponding to a target price of 58.8 yuan per share, and maintain a "strong push" rating; The discount rate of the company's AH shares is 60%, that is, 36 times PE for Hong Kong stocks in 2025, corresponding to a target price of HK$37.8 per share, and the "strong push" rating is maintained.

Risk warning: downstream demand is less than expected; New product launches are less than expected; Capacity support is less than expected; Risk of changes in the external trade environment.