Longsys' net profit hit a new low last year, and the company said that AI demand is expected to improve the supply and demand pattern of semiconductor storage

Source | Times Business School

Author | Chen Jiaxin

Edit | Zheng Shaona

In the first quarter of this year, the semiconductor storage industry rebounded rapidly, and Longsys' revenue and net profit increased by more than 200% in the same period.

On April 21, Longsys successively released 44 announcements, including the 2023 annual report and the first quarter report of 2024. Although the performance in the first quarter of this year has grown rapidly, it is worth noting that Longsys' earnings performance in 2023 is not optimistic, and it remains to be seen whether it can maintain long-term rapid growth throughout this year.

According to the financial report, in 2023, Longsys' operating income will be 10.125 billion yuan, a year-on-year increase of 21.55%, but the net profit loss in the same period will be 837 million yuan, a year-on-year decrease of 1250.12%, the largest loss since the disclosure of financial data in 2018.

On April 29, Longsys' share price closed at 99.30 yuan per share (before the right to reset), up 1.52%, with a total market value of 40.997 billion yuan.

Net profit in 2023 will decrease by 1250% year-on-year, and companies are optimistic about the recovery of the industry this year

Regarding the sharp decline in net profit in 2023, Longsys said in its annual report that it is mainly affected by the slowdown in global economic recovery and rising inflation, the weak demand in the end market, especially the sluggish market demand for mobile phones and CPC, which are affected by consumer spending, and the sharp fluctuations in the memory chip industry pose a severe test to the company's operation.

According to the annual report, the downward cycle of the semiconductor storage industry spanned the entire 2022 and continued until the end of the third quarter and the beginning of the fourth quarter of 2023. Semiconductor storage prices continue to be sluggish, and the global semiconductor storage market has shrunk dramatically. According to CFM flash memory market statistics, the global semiconductor memory market size is expected to decrease by 38% year-on-year to $86.8 billion in 2023.

The annual report also shows that in the face of the market downturn, since the end of the third quarter of 2023, the world's top five storage wafer manufacturers have begun to take continuous production reduction measures, superimposed on the downstream terminal market into the traditional peak season, the downstream market demand has gradually recovered, and the semiconductor storage industry has rapidly entered an upward cycle.

This is also reflected in Longsys' performance. In the fourth quarter of 2023, Longsys' operating income increased by 108.31% year-on-year, and its net profit increased by 133.38% year-on-year, and in the first quarter of 2024, Longsys' performance growth accelerated again, with operating income of 4.453 billion yuan, a year-on-year increase of 200.54%, and net profit of 383 million yuan, a year-on-year increase of 236.52%.

As for the future development of the storage industry and its own business, Longsys told Times Business School that from the perspective of comprehensive supply and demand, the capital expenditure of the original storage factory focuses on high-end storage, the overall supply growth of memory chips is limited, and the recovery of traditional market demand such as mobile phones and PCs in the downstream of storage is superimposed, and the demand for terminals and servers brought by AI has been catalyzed, and the storage supply and demand pattern has been significantly improved. According to the forecast of WSTS (World Semiconductor Trade Statistics Corporation), the global storage market will grow by 45% year-on-year in 2024, reaching $129.8 billion, and the industry scale is expected to recover to the level of 2022. In the process of market recovery, the company, as a leading semiconductor storage enterprise in China, is expected to be the first to benefit by virtue of its forward-looking strategic layout, profound technology accumulation and keen market insight.

Regarding the opportunities brought by the explosive growth of AI, Longsys said in the annual report that with the implementation of various artificial intelligence (AI) large model technologies in 2023, the demand for AI server market will accelerate growth. In terms of semiconductor storage, HBM (High BandwidthMemory) and DDR5 memory modules are the most beneficial.

Regarding the implementation of AI-related products, Longsys replied to Times Business School that DDR5 memory not only provides higher bandwidth and larger capacity, but also achieves lower power consumption, which can better meet the training and inference needs of AI large models. The company's enterprise-level storage (eSSD+RDIMM) has passed the certification of important customers including Lenovo, JD Cloud, BiliBili, etc., and has achieved mass production and shipment at some customers. HBM technology involves the upstream of the company, that is, the technical composite application of different links such as memory chip design technology and wafer-level stacking technology of the original storage factory. Although the company currently has the capacity to mass produce wafer high-stack packaging, which is part of HBM technology, it is currently unable to produce HBM.

The large increase in inventory led to high impairment, and the decline in net profit margin of the two subsidiaries did not provide for goodwill impairment

Asset impairment losses are also an important reason for Longsys' large losses in 2023.

According to the financial report, in 2023, Longsys' asset impairment loss will be 356 million yuan, a year-on-year increase of 120.47%, which is mainly due to the provision for inventory impairment.

At the end of 2023, Longsys' inventory reached 5.893 billion yuan, a year-on-year increase of 57.40%, accounting for 43.08% of total assets, and the new inventory decline provision in 2023 alone was 356 million yuan.

However, for the goodwill of RMB 869 million generated by the new acquisition of two companies in 2023, Longsys did not make any provision for goodwill impairment when its profitability declined.

In order to strengthen its independent production capacity, in October and December 2023, Longsys acquired Yuancheng Technology (Yuancheng Technology (Suzhou) Co., Ltd.) and Zilia (Zilia Eletrônicos and Zilia Semicondutores), respectively, and added 869 million yuan of goodwill.

However, both companies were in the red after the acquisition. According to the annual report, from the acquisition date to the end of 2023 (October 1, 2023 - December 31, 2023), Yuancheng Technology achieved an operating income of 77.1293 million yuan, a net profit loss of 10.7809 million yuan, and a net profit margin of -14% during the period; On December 31, 2023), Zilia achieved an operating income of 37.2116 million yuan, while a net profit loss of 18.1866 million yuan, with a net profit margin of -48.87% during the period.

As a comparison, the announcement shows that in the first half of 2022-2023, the net profit of Yuancheng Technology will be 560,500 yuan and -3.2166 million yuan respectively, and the net profit margin will be 0.13% and -1.79% respectively.

In fiscal year 2022 (August 1, 2021 to July 31, 2022) and fiscal year 2023 (August 1, 2022 to July 31, 2023), Zilia's net profit was BRL 288 million (RMB 374 million at the end of the exchange rate) and -49 million Brazilian reais (RMB 74 million at the end of the exchange rate), respectively, with a net profit margin of 12.85% and -5.15%, respectively.

It can be seen that after the acquisition, the profitability of the two companies represented by the net profit margin has declined, but Longsys has not made any provision for impairment of the relevant goodwill.

In this regard, Longsys responded to Times Business School that on December 31, 2023, the company conducted an impairment test on the two assets of Yuancheng Technology and Zilia acquired this year, and the recoverable amount of the two assets was higher than the book value, and there was no impairment, so there was no need to provide for goodwill impairment.

However, there have been cases in which A-share listed companies have made provision for impairment of goodwill in the year of their acquisition. For example, in October 2019, Baichuan Energy (600681. SH) acquired 100% of the equity of Suizhong Dadi Natural Gas Pipeline Co., Ltd. for a consideration of 25.0478 million yuan, and generated 470,700 yuan of goodwill, and two months later (at the end of 2019), Baichuan Energy fully accrued this part of the goodwill.