Shanghai Anlogic Infotech Co Ltd_ Worst has passed, Await demand improvement

Summary of Conference Call Notes on Shanghai Anlogic Infotech Co Ltd Company Overview - Company: Shanghai Anlogic Infotech Co Ltd (688107.SS) - Industry: Field Programmable Gate Arrays (FPGA) within the semiconductor sector Key Points and Arguments Industry Dynamics - The FPGA market is expected to return to growth in 2025 after experiencing a trough in mid-2024, with a projected YoY growth of 27% for Anlogic in 2025 due to localization trends in China [1][2] - The FPGA segment accounted for only 1.6% of total semiconductor revenue in 2023, indicating its niche status [6] - Communication demand remains weak, with a significant decline in newly built 5G base stations in Q3 2024, down 36% QoQ and 32% YoY [12][39] Financial Performance - Anlogic's revenue showed three consecutive quarters of growth in 2024, but overall demand remains weak due to ongoing inventory digestion [12] - The company's gross margin dropped from 50% in Q4 2023 to 27% in Q3 2024, primarily due to product mix and pricing declines [13] - Despite revenue growth forecasts, Anlogic is expected to remain loss-making in 2025, with EPS estimates swinging to a loss [10][13] Price Target and Valuation - The price target for Anlogic has been raised to Rmb34.40, reflecting a higher target P/S ratio of 15.7x, despite earnings cuts for 2024-2026 [3][23] - The valuation model is based on a P/S ratio due to the company's history of losses and the need for heavy R&D investment [47] - Anlogic's P/S ratio is in line with global peer Lattice, but profitability remains significantly lower [24][25] Risks and Challenges - High R&D expenses are expected to continue, remaining above 40% of sales for 2024 and 2025, which may hinder profitability [10][13] - The company faces challenges in achieving higher revenue scale and maintaining a double-digit P/S valuation, requiring a CAGR of 20-30% over the next five years [25][47] - Limited visibility on communication demand recovery poses a risk to future revenue growth [12][39] Other Important Insights - The localization trend in China is driving a shift towards local vendors, which may benefit Anlogic in the civilian FPGA market, although urgency is less compared to specialty FPGAs [2] - Inventory levels in the FPGA market are currently high, with Lattice's inventory days at 218 days, indicating a need for normalization [17] - The overall sentiment in the A-share market has improved, contributing to the revised price target [23] Conclusion - Anlogic is positioned to benefit from the localization trend in China, but faces significant challenges in terms of profitability and demand recovery in the communication sector. The company's future growth will depend on its ability to navigate these challenges while maintaining a focus on R&D and product competitiveness.