Deducting non-net profit is expected to increase by more than 700 times, but it is bearish!Can Montage Technology's valuation be reshaped under the AI wave?

Technology investment opportunities under the wave of AI have attracted great attention from investors, especially the driving effect of the blowout demand for servers and computing power on related semiconductor chips. Affected by the industry's destocking and sluggish demand, the performance of the local semiconductor industry chain in 2023 is generally unsatisfactory.

On the evening of April 9, Montage Technology (688008. SH) released its 2023 annual report and the announcement of the expected increase in performance in the first quarter of this year, affected by the downward cycle of the semiconductor industry, the company's revenue and net profit both declined, and the year-on-year decline in net profit hit the largest since its listing. Montage Technology admitted in its annual report that due to the destocking of customers due to the decline in demand in the global server and computer industries, the company's DDR4 memory interface chip and Jindai ®CPU shipments decreased significantly compared with the same period last year. With the recovery of downstream demand this year, Montage Technology expects the net profit attributable to the parent company to increase by at least 9.65 times in the first quarter, which temporarily ranks first in the A-share pre-increase announcement in the first quarter.

On April 10, the company's stock price almost fell below the all-time low of 41.5 yuan (before the resumption), closing down 2.49%, and the decline was nearly 27% for the year. INTEL CAPITAL, WHICH HAD BEEN A SHAREHOLDER OF MONTAGE TECHNOLOGY BEFORE ITS IPO, AND ITS CONCERTED ACTORS SOLD MORE THAN 35 MILLION SHARES OF THE COMPANY LAST YEAR, AND NORTHBOUND FUNDS MADE A SMALL NET PURCHASE THROUGHOUT THE YEAR.

After the world enters the AI era, the demand for computing power and storage of computers has grown rapidly, and the market is generally optimistic about 2024 or the first year of AI PC. Can Montage Technology ride the wave of AI and usher in a reshaping of performance and valuation?

The performance of the first quarter reversed year-on-year, but it was bearish by funds

On the evening of April 9, Montage Technology released its 2023 annual report and 2024 first quarter performance increase announcement, after experiencing the sluggish demand of the whole industry in 2023, the demand for memory interface chips has gradually recovered since the beginning of this year, and the company expects to achieve operating income of 737 million yuan in the first quarter of 2024, an increase of 75.74% over the same period of last year, net profit attributable to the parent company is expected to be 210 million yuan ~ 240 million yuan, an increase of 9.65 times ~ 11.17 times over the same period of last year, and non-net profit is expected to be 210 million yuan ~235 million yuan, an increase of 708.62 times ~ 793.10 times over the same period of the previous year.

On April 10, the company's share price fell all the way after the opening, with the largest intraday decline of 4.5%, closing at 43.15 yuan, down 2.49%, with a total market value of 49.25 billion yuan.

In the fourth quarter of last year, ChinaAMC SSE STAR Market 50 ETF and E Fund SSE STAR Market 50 ETF increased their holdings of Montage Technology by 2,921,900 shares and 1,842,100 shares respectively, while Xingquan Herun and Guolianan CSI All-Index Semiconductor ETF slightly increased their holdings by 827,300 shares and 845,300 shares respectively. According to Montage Technology's updated disclosure, the above four products have increased their holdings of more than 11 million shares of the company as of February 5 this year.

IN ADDITION, INTEL CAPITAL AND ITS CONCERTED ACTORS THREW OUT A SHAREHOLDING REDUCTION PLAN AS EARLY AS THE BEGINNING OF 2023, THE SHAREHOLDER HELD A TOTAL OF 101 MILLION SHARES OF MONTAGE TECHNOLOGY BEFORE THE REDUCTION, AND AFTER FOUR CONSECUTIVE QUARTERS OF REDUCTION, INTEL CAPITAL SOLD ABOUT 35.6 MILLION SHARES FOR THE WHOLE YEAR, AND AS OF DECEMBER 31, 2023, THE SHAREHOLDER HELD 66.0823 MILLION SHARES OF THE COMPANY.

Specifically, look at the performance. In 2023, the global demand for servers and computers will decline, and industry companies are generally facing operational pressure to destock. During the reporting period, Montage Technology achieved operating income of RMB2.286 billion, down 37.76% year-on-year, net profit attributable to the parent company of RMB451 million, down 65.30% year-on-year, and net profit attributable to the parent company of RMB370 million, down 58.11% year-on-year. The company plans to pay a cash dividend of 3 yuan for every 10 shares, with a total dividend of 338 million yuan.

During the reporting period, Montage Technology's interconnection chip product line achieved sales revenue of 2.185 billion yuan, a decrease of 20.11% from the previous year, and Jintide ® server platform product line achieved sales revenue of 94 million yuan, a decrease of 90.01% from the previous year, and the company's DDR4 memory interface chip and Jintide ®CPU shipments decreased significantly compared with the same period last year.

Montage Technology cited four reasons for the decline in net profit: (1) operating income decreased by 37.76% over the same period last year;(2) total investment income and fair value change income decreased by RMB462 million over the same period last year; (3) R&D expenses during the reporting period were RMB682 million, an increase of 21% over the same period last year;(4) Provision for asset impairment loss was RMB193 million, an increase of RMB166 million over the same period last year.

In the fourth quarter of 2023, Montage achieved revenue of RMB760 million, an increase of 42.96% quarter-on-quarter, and net profit attributable to the parent company of RMB217 million, an increase of 40.89% quarter-on-quarter, both of which were the highest in a single quarter. The company said in the latest survey that the current round of destocking in the server and computer industry is nearing the end, and the inventory situation has continued to improve since the second quarter of 2023.

In the first quarter of this year, Montage Technology expects to achieve operating income of 737 million yuan, an increase of 75.74% over the same period of last year, and net profit attributable to the parent company of 210 million yuan ~ 240 million yuan, an increase of 9.65 times ~ 11.17 times over the same period of last year.

How will the blowout of AI demand affect Montage Technology's performance this year?

The world has entered the AI era, and related innovations are expanding from the construction of computing infrastructure to the implementation of AI terminals such as AI mobile phones, AI PCs, and AIoT, which will bring a new round of growth to semiconductors and boost the demand for related chips, which is regarded as the most important starting point for technology investment in 2024.

At present, DRAM has been iterated to DDR5, which is a great improvement in various parameters compared with DDR4, and the DDR5 sub-generation iteration has been officially started, and it is faster than the DDR4 sub-generation iteration. From the perspective of the development law of memory interface chips, the faster the iteration of the child generation, the more helpful it will be to maintain the average sales price and gross profit margin of the product.

At present, the mainstream view of the industry is that the penetration rate of DDR5 will continue to increase this year and next, and it is expected to exceed 50% by the middle of this year. As a leader in the DDR5 track and deeply involved in the formulation of JEDEC industry standards, Montage Technology has attracted market attention for its performance in the context of the continuous recovery of demand in the server and computer industries in 2024.

According to a semiconductor industry insider, the key to the growth of DRAM demand is driven by AI demand, rather than the traditional consumer electronics market such as smartphones and tablets. Previously, Micron estimated that the DRAM capacity of AI servers was about 6~8 times that of ordinary servers, and according to the public information on Hynix's official website, Hynix believes that the DRAM capacity of AI servers is about 2~4 times that of ordinary servers.

"The inventory depletion of large chip categories has basically come to an end, and the main growth point of logic chips such as memory and storage comes from the massive data storage demand generated by AI large model training. As data density increases in data centers, NAND usage per unit server is expected to increase by a factor of three and DRAM by a factor of two. The above-mentioned semiconductor industry insiders told reporters: "The blowout of AI demand may make the server side surpass the mobile phone side to become the largest market for DRAM." ”

In addition, 2024 is regarded as the first year of AI PCs (AI PCs), as AI PCs require higher bandwidth memory to improve the overall computing performance, the industry trend of AI PCs may drive the penetration rate of DDR5 on the PC side, driving the demand for DD5R. Intel has brought AI PCs based on Core Ultra processors to consumers around the world, as well as the new Xeon 6 processors, which are mainly used for the training of large models.

Montage Technology has released the fourth-generation Jintide CPU and the fifth-generation Jintide ®®CPU, and the company has simultaneously carried out the relevant testing and verification of the first-generation AI chip engineering samples, carried out business adaptation on the relevant application platforms, and successively sent samples and collected feedback to potential customers.

(This article is from Yicai)