The company is the leader of the national team of high-end processors, leveraging the strength to move towards the road of independent iteration.

The company's largest shareholder is Sugon, backed by the Institute of Computing of the Chinese Academy of Sciences, the technology originated from AMD, products include high-end general-purpose processor CPU and co-processor DCU, which can be applied to servers, workstations and other computing and storage devices.

DCU: Generative AI will drive the supply and demand of domestic GPUs to boom in 2025, and the company's DCUs have the advantage of ecological compatibility and are expected to achieve unexpected volume expansion in commercial markets such as the Internet.

(1) According to IDC data, China's accelerated server market will reach US$9.4 billion in 2023 (up 104% year-on-year) and is expected to reach US$12.4 billion in 2028 (CAGR of 5.7% from 2023 to 2028); We believe that with the advancement of the localization process of the domestic chip industry chain and the shift of AI demand from training to inference, the supply side of domestic GPUs will continue to improve. At the same time, the capex of operators and Internet customers is also expected to be tilted towards AI, and 25 years may become the first year of domestic GPU volume. (2) The company's DCU is a kind of GPGPU, which adopts the "CUDA-like" general parallel computing architecture, which has the three advantages of strong computing power, high-speed parallel data processing ability, and good software ecological environment, supports mainstream deep learning frameworks and mainstream application software, and can realize the comprehensive application of large models represented by GPT and LLaMa, and fully adapt to domestic large models including Wenxin Yiyan and Tongyi Qianwen, reaching the leading level in China; We are optimistic about the new generation of DCU represented by the company's Shensuan No. 3, which is expected to be increased in customers such as the Internet.

CPU: The supply is improving, and it is vigorously moving towards the 300 billion x86 commercial market.

(1) Commercial market: x86 is the current mainstream server CPU architecture, with the industry's best industrial ecological support; According to IDC, x86 architecture servers will account for 88% of the market share in 2023, and China's x86 server market shipments will be 3.62 million units, which is expected to grow by 5.7% in 2024, and the average price of 80,000 / unit is estimated that China's x86 server market is expected to reach 306 billion yuan in 2024; We believe that the company has completed product polishing in the information and innovation market, and is expected to expand Internet customers together with OEMs, and the future of commercial CPUs can be expected; (2) Information and innovation market: Circular 79 requires that in 2027, "it should be replaced and can be replaced", and we believe that the overall information and innovation market will continue to maintain a rapid growth trend in the next two years, and the company has an ecological compatibility advantage in the information and innovation market, which is expected to appear in small and medium-sized information innovation customers; (3) Supply side: Since the beginning of 2024Q4, the company's cash flow for advance payment, purchase of goods and payment for labor services, and inventory have increased significantly year-on-year, reaching 30.90/17/2.455 billion respectively at the end of 2024Q2, +65.36% /110.47% /177.84% year-on-year, and +8.21%/19.67%/43.67% month-on-month, which we believe represents a significant improvement in the company's upstream supply. At the same time, the increase in stocking also represents the company's optimistic expectation of future demand.

Investment advice.

(1) We believe that the No. 3 DCU and Haiguang No. 4 CPU are expected to make efforts among Internet customers, and the 100 billion commercial market has been opened, so we are optimistic about the company's future development prospects;

(2) It is expected that the company's operating income in 2024-2026 is expected to reach 81.54/111.41/14.513 billion yuan (+35.56%/36.64%/30.27% year-on-year), and the net profit attributable to the parent company is expected to be 16.47/22.91/3.023 billion yuan (+30.36%/39.13%/31.97% year-on-year) in 2024-2026, according to the closing price on December 3, the corresponding PE is 177.0/ 127.2/96.4, maintaining a "buy" rating.

Risk warning: insufficient supply of upstream chips, intensified competition in the midstream, insufficient effective demand in the downstream, lower than expected product and technology level, lower than expected gross profit margin of products, geopolitical risks, etc.