I. Incident Overview

On 2021/8/25, the company released its semi-annual report, achieving revenue of 8 billion yuan, +14% year on year.

II. Analysis and Judgment

Q2 Performance dragged down by the consumer electronics business

1) 21H1: Achieved revenue of 8 billion yuan, +14% year on year; gross profit margin was 9%, -3.0 pct year on year; return to mother's net profit was 270 million yuan, +42% year on year; after deducting 70 million yuan from non-Gumi, -76% year on year.

2) 21Q2: Achieved revenue of 4.1 billion yuan, +14% year on year, +8% month on month; gross profit margin was 11%, -4.0 pct year on year, +3.0 pct; return to mother's net profit was 73 million yuan, -34% year on year and -64% month on month. Deduct 0.05 billion yuan from the mother, -97% year on year and -93% month on month.

3) The decline in Q2 performance was mainly due to ① mobile phone business losses of 73 million yuan, which was slightly profitable during the same period; ② Shenzhen Technology Huizhou paid 56 million yuan in employee relocation and placement fees.

Storage testing: Production capacity is full, and the new Hefei plant is expected to be put into operation by the end of the year1) 21H1 achieved a net profit of 64 million yuan, -14% over the same period last year. Shipments in this period increased sharply year over year, but performance declined slightly due to phased product structure adjustments, R&D investment, and personnel formation.

2) The world's top, mainland number one +full dram/nand/module coverage+high quality customers (Kingston, Western Digital, etc.) have been developing for many years, and technical customers are excellent.

3) Changxin+Changcun led mainland storage from 0-1, and the company is already on the cusp of development. Changxin/Changcunda's post-natal revenue volume is 100 billion yuan each, and the planned production capacity is 360,000 tablets/300,000 tablets per month respectively. Changxin/Changcun production capacity is expected to rise rapidly to 12/8-100,000 tablets in 2021. Currently, the company's Shenzhen plant is operating at full capacity, and the Hefei plant will accelerate the expansion of production to guarantee production capacity for major customers.

4) In 2020, the global DRAM/NAND market size was 652/55.2 billion US dollars. The estimated size of the DRAM/NAND market in mainland China was 222/20.4 billion US dollars. The large market provided a “track” for the company's long-term development.

5) The company cooperates with the Hefei Economic Development Committee. Payton will invest a total of 3.06 billion yuan to establish Hefei Payton with the National Big Fund Phase II, Hefei Economic Development Venture and China Electric Juxin. The investment ratio (and equity ratio) is 55.88%/31.05%/9.8%/3.27% respectively.

Of these, the first investment of 400 million was completed in 2020, and the company reviewed and approved the remaining investment in 2021/6.

6) Project progress: The first phase of the main structure was capped on 2021/6, and production capacity is expected to be achieved by the end of 2021.

Other businesses: The divestment of the mobile phone business continues to advance, and other businesses provide stable profits 1) Smart meters: Chengdu subsidiary's revenue in 2021 was 850 million, -18% year on year; net profit was 160 million, -16% year on year.

The company continues to explore overseas markets and continues to develop business in Arabia, Italy, England, Malaysia and other countries in this period.

2) Consumer electronics: This business has been losing money for a long time. The Guilin subsidiary, which mainly operates this business, lost 07.3 billion dollars in the current period due to the shortage of raw materials from mobile phone manufacturers and the fact that new products are still being developed by customers. There was a slight profit in the same period last year. On 2021/6, the company announced a change in the divestment plan for the consumer electronics business. Due to the withdrawal of Lingyi Zhizao, the company's shareholding ratio of Bosheng Technology was changed from 34% to 48%. The announcement plan remained unchanged. The company is actively promoting business integration. At present, Shenzhen Technology has completed business relocation in Huizhou.

3) Medical devices: During the epidemic, the company's ventilator product market increased steadily, and virus testing orders continued to increase.

4) Automotive Electronics/Supercapacitors: Cooperation has been established with well-known automotive power battery system companies, and several models have been mass-produced; long-term stable cooperation has been formed with leading international supercapacitor manufacturers.

5) Shenzhen Science and Technology City: Tower C of the first phase of the Caitian Industrial Park project has been capped. It is expected to be completed by the end of 2021, and the inspection of investment promotion pre-leasing work has officially begun. It is estimated that after the completion of the first phase, it will contribute 5-6 billion dollars in rent per year.

III. Investment advice

The company's net profit is estimated to be 85/1.05 billion in 21-22, respectively, and the corresponding valuation is 31/25 times, respectively. Referring to SW Semiconductor's 2021/8/25 latest PE (2021) 70 times, maintaining the “recommended” rating.

4. Risk warning:

Payton's expansion fell short of expectations, capacity expansion for major customers fell short of expectations, and consumer electronics business integration fell short of expectations.