Summary of Key Points
ZhaoYi Innovation’s performance in the first half of the year was “explosive”: revenue reached 11.566 billion yuan (a 178% increase), and net profit attributable to the parent company was 6.857 billion yuan (a 1091% increase), earning more than the total profits of the previous five years in just half a year, mainly due to the simultaneous increase in both the volume and price of its memory chips. However, the stock price has plummeted from a high of 846 yuan to 403 yuan, with a market value evaporating by 330 billion yuan in 50 days. The market’s concerns focus on four main issues: Can the high profit margins in the memory business be sustained? Is it reliable that 30% of the profits come from stock trading (which is not the company’s core business)? Is the high proportion of financial assets a significant risk? Does the reduction in institutional holdings and the increase in retail investor participation indicate that the market peak has been reached? Although the company has ample cash flow and healthy inventory, concerns about the potential turning point of the industry cycle remain, keeping the market cautious.
Detailed Analysis
1. The “Sweet Spot” of the Memory Cycle: How Long Will It Last?
The core reason for ZhaoYi Innovation’s dramatic performance is the simultaneous increase in both the volume and price of its memory chips. The memory business now accounts for 85% of total revenue, generating 9.8 billion yuan (a 245% increase), with gross profit margins rising from 42% last year to 67%, boosting the overall margin to 63%. This is driven by a global shortage of memory chips due to the surge in demand from AI data centers, which is independent of the traditional consumer electronics cycle.
However, the market worries that this “sweet spot” will not last long. Morgan Stanley predicts a 50% increase in DDR4 prices in the third quarter and another 10% increase in the fourth quarter, but industry experts believe that there is limited room for further significant profit margin growth and that this situation can be sustained for only a short time. ZhaoYi itself acknowledges that DRAM prices will rise moderately rather than skyrocketing as before. In other words, while profits are high now, the growth rate is likely to slow down, and the cycle could turn at any time.
2. The “Water Content” in Profits: Is Stock Trading Reliable?
The net profit attributable to the parent company of 6.8 billion yuan looks impressive, but the net profit after deducting non-recurring items is only 4.8 billion yuan—the difference of 2 billion yuan comes from stock trading. In the first half of the year, the company’s securities investments increased from 278 million yuan to 2.576 billion yuan, with gains from fair value changes amounting to 2.16 billion yuan (30% of the net profit). The eight technology stocks held by the company (such as LianXun Instruments and ZhenBao Technology) saw significant price increases during the second-quarter tech boom.
The problem is that June 30th was the peak for technology stocks, and after July, the sector experienced a correction. For example, ZhenBao Technology’s stock price dropped from 690 yuan to 311 yuan, and other holdings also fell. This means that the profits from stock trading in the second quarter could be lost or even turn into losses in the third quarter. The money earned from the core business is real, but the gains from stock trading are volatile and can disappear at any time, which the market does not accept.
3. The Surge in the Proportion of Financial Assets: Is the Floating Profit from ChangXin Technology a Blessing or a Curse?
Financial assets account for 34% of ZhaoYi’s total assets, with other equity instruments (mainly ChangXin Technology) accounting for 27% and other non-current financial assets accounting for 7%. ZhaoYi invested 2.3 billion yuan in ChangXin Technology, which resulted in a floating profit of 10 billion yuan by the end of the first half of the year. After ChangXin’s listing in July, this profit increased to 62.5 billion yuan (equivalent to 147% of ZhaoYi’s total assets).
However, these gains are “paper wealth.” If the stock price of ChangXin falls, the floating profit will disappear. For instance, if the price drops from 57.55 yuan on August 19th to 30 yuan, ZhaoYi’s floating profit would be halved. A high proportion of financial assets makes the company’s performance highly susceptible to market fluctuations, posing significant risks.
4. The Mystery of the Stock Price Drop: Institutions Leaving, Retail Investors Taking Over?
The stock price dropped from 846 yuan to 403 yuan due to institutional investors selling their shares. The actual controller, Zhu Yiming, cashed out 4.4 billion yuan (through sales between May and June), and insurance funds such as China Life Asset Management Plan also sold off shares. Meanwhile, retail investors entered the market at higher prices: the number of shareholder accounts increased from 170,000 to 360,000 (a 105% increase), with the average number of shares held per account decreasing from 3,800 to 1,900—typical of an institutional sell-off followed by retail buying.
Although the company later announced plans to increase its holdings by 1 billion yuan and repurchase shares for 1-2 billion yuan, the market is skeptical. The increase in holdings is not expected until the end of the year, and the maximum repurchase price is set at 750 yuan (currently only 403 yuan), indicating a lack of sincerity. There is also significant disagreement among analysts: Nomura predicts earnings of 4.4 billion yuan for the year, while Bank of Communications predicts 1.39 billion yuan, showing complete discord in forecasts about the company’s future performance.
5. The “Safety Cushion” of the Business Model: Are Cash Flow and Inventory Reliable?
ZhaoYi’s Fabless model (designing chips without manufacturing) is an advantage, as it eliminates the need to stockpile inventory, resulting in ample cash flow—6 billion yuan in operating cash flow in the first half of the year (a 5-fold increase), more than the total for 2024 and 2025 combined. Inventory amounts to 4.1 billion yuan (a 36% increase), mainly consisting of finished products and work-in-progress, which accounts for a low proportion of total assets and poses relatively little risk. Accounts payable also increased by 102%, indicating the company’s ability to leverage supplier funds and maintaining a healthy financial position.
However, this only provides resilience against declines; if the memory cycle reverses and demand falls, even a good business model will be affected. The market is concerned that the current excellent performance may be at the peak of the cycle, with potential declines in the future.
Conclusion
ZhaoYi Innovation is a leader in the memory industry with strong performance and a favorable business model. However, the market’s concerns address critical issues: the sustainability of the cycle, the high proportion of non-core business profits, the risks associated with financial assets, and the impact of shareholder selling off shares and retail investors taking over. The significant drop in the stock price is not accidental; it reflects the market’s skepticism about the combination of a peak cycle, volatile profits, and investor exits. Whether the stock price can recover depends on whether the memory cycle can continue to be profitable and whether the company can reinvest the gains from stock trading back into its core business.
(The entire analysis is presented in plain language to make it understandable even for those outside the financial industry.)