First Shanghai released a research report stating that after adjusting the Shanghai Fudan (01385) to “hold” rating, the company's revenue CAGR for the next three years is 5.1%, the corresponding net profit CAGR is 9.1%, and the target price is HK$16. Currently, the semiconductor industry has yet to see a clear recovery in demand other than AI-related products, and the company's revenue from all businesses has been under pressure for 24 years. However, stable orders from downstream customers in the FPGA business and the demand for smart meter tenders are expected to drive the growth of these two businesses.

First, Shanghai's main views are as follows:

Quarterly results summary:

The company achieved revenue of 0.89 billion yuan in 2024Q3, a year-on-year decline of 5.5%. The revenue for each product line was 0.21 billion yuan for security and identification chips, 0.24 billion yuan for non-volatile memory, 0.1 billion yuan for smart meter chips, 0.32 billion yuan for FPGA and other chips, and 0.02 billion yuan for testing services. The gross profit margin was 52.1%, down 7.7pct year on year, and 4.2pct month-on-month. The month-on-month decline was mainly due to lower unit prices for storage and MCU products. Operating profit was 0.07 billion yuan, down 65.4% year over year. Net profit attributable to mother was 0.079 billion yuan, after deducting non-return net profit of 0.076 billion yuan, a year-on-year decrease of 59.8%. After deducting non-earnings per share, it was $0.10, compared to $0.23 for the same period last year.

The stock market is fiercely competitive, and various businesses continue to be under pressure, and FPGA gross margin has declined slightly:

Since 2024, the company's various businesses have been affected by fierce competition in the stock market. In order to consolidate market share and structurally lower prices for various products, the overall gross margin is expected to drop by 5% this year. In the first nine months of 2024, FPGA and other chip sales revenue was 0.88 billion yuan, down 3.7% year on year. Many of the company's models are based on 1xnm

FinFET's FPGA products have completed sample testing, and some products have already been sold in small batches. In the future, we will continue to promote yield improvement and product lineage expansion. Furthermore, samples of next-generation CPU+FPGA+AI fusion architecture products based on 1xnmFinFET have been successfully tested, and samples have been sent to a small number of customers one after another. However, at present, we have not seen a clear upward cycle in the next few quarters. Combined with fierce competition in the stock market, it is estimated that the gross margin of FPGA products will be adjusted to 75%.

The Q3 smart meter business grew by 28.9% year-on-year due to increased demand for tenders:

Due to the increase in the number of power grid tenders this year from two times last year to three this year, smart meter business revenue increased 28.9% year-on-year to 0.32 billion yuan this quarter. The company is actively deploying automotive electronics, smart furniture and other fields. Currently, the 55nm and 90nm embedded flash memory processes have been completed, and will continue to develop more highly reliable industrial and automotive-grade MCU products to further enrich its 12-inch process platform in the future. However, GM MCU products are still affected by industry production capacity and inventory clearance due to the weakness of the terminal consumer market, and MCU sales prices are under great pressure.

Risks: Risk of product sales falling short of expectations, product price adjustments, increased market competition, R&D progress falling short of expectations, and limited production capacity.