Investment Highlights:

Espressif Systems is a small and beautiful IoT chip design manufacturer with a technical background and a stable overall operation. The founders have rich experience in communication chip design and a stable core team. The equity structure is relatively concentrated, the equity incentive mechanism is perfect, the confidence is demonstrated, and the enthusiasm of the team is continuously stimulated. The performance has increased steadily, the product matrix has expanded, the revenue sources have gradually diversified, the operation has become more stable, and the high versatility and long life cycle attributes of the products have led to a relatively controllable risk of inventory price decline.

Competitive advantage: Start with communication chips and build system-level ecological barriers. 1) To meet the needs of the Internet of Things, develop low-power and high-performance chips. Based on the open-source RISC-V architecture, it has flexibility, scalability, and cost advantages, and better adapts to the needs of AI devices on the device side. 2) Establish ecosystem-level competitive advantage. Espressif's IoT operating system, ESP-IDF, supports the world's leading IoT IoT networks, has a rich toolchain and software library, and a developer community that attracts more than 3 million developers from around the world. In the 2D2B business model, the developer ecosystem has a platform effect, and the number of developers forms a "flywheel" with the number of software and hardware.

Divide the "cost-effective + high-performance" product line, and take cost-effective products as the cornerstone to open up the high-end market. The high-performance product line is aimed at customers who focus on processing performance and complex software solutions; The cost-effective product line is aimed at customers who focus on connectivity and lightweight software applications. According to the timeline, it can be divided into "classic", "new class" and "new product": "classic" includes high-performance ESP32, S2 and cost-effective ESP8266; The "new class" includes the high-performance S3 and the cost-effective C2/C3; The "new products" include the high-performance P4/H4 and the cost-effective H2/C5/C6.

Wi-Fi MCU faucet, expanding wireless SoCs. Wi-Fi MCUs started as wireless SoCs that support a variety of wireless communication protocols, including Wi-Fi 6, Bluetooth 5.0, and Thread/Zigbee. Layout "Process" + "Join", boundary extension.

According to TSR statistics, as of 2022, Espressif Systems has ranked first in global Wi-Fi MCU chip shipment share for six consecutive years. In comparison with Realtek, Broadcom Integration and other companies in the same industry, the company's chip performance has advantages. The recovery of the downstream AIoT market such as smart home and smart wearable is supported, and it is expected that the intelligence rate and penetration rate of the downstream of the Internet of Things will increase.

In cooperation with major manufacturers such as Byte, open source projects have prospered and benefited from the outbreak of end-side AI. At the Byte FORCE2024 Power Conference, Volcano Engine, Espressif Systems and other companies jointly released the AI+ Hardware Intelligent Leap Program, and Espressif can provide a one-stop Turnkey solution to achieve end-side processing + cloud calling. In terms of robots, Espressif's desktop robots such as ESP-SparkBot, which is supported by software and hardware, have been launched. In terms of AI glasses, the investment in Thunderbird glasses and the OpenGlass project has made dual efforts.

Espressif Systems was covered for the first time with a "Buy" rating. It is estimated that the company's operating income in 25-27 years will be 26.10/34.13/4.465 billion yuan, and the net profit attributable to the parent company will be 4.5/6.1/830 million yuan respectively, and the corresponding PE will be 53/39/29 times (the weighted average PE of the market value of comparable companies in 25-26 years is 67/50 times). The 2025 market capitalization-weighted average PE of comparable companies is 67 times, and the 2025 PE of Espressif Systems is 53 times, which is lower than the industry average, and there is a lot of room for growth.

Risk Warning: 1) The risk of intensified competition in the industry; 2) the risk that the market expansion of Bluetooth Low Energy and Thread/Zigbee does not meet expectations; 3) the risk that the R&D progress is not as expected; 4) The risk of stagnation of downstream applications of the Internet of Things.