Item: Zhongjing science and technology core focus

1. Since its inception, the company has been focusing on 3-6 inch semiconductor silicon materials, including semiconductor silicon rods and semiconductor silicon wafers. Although the semiconductor wafer size tends to shift to large sizes such as 12 inches, and 3-6 inch products account for the smallest proportion of the wafer shipping area, it has been basically maintained at about 10% in recent years.

Based on technical and cost considerations, many discrete devices are still produced on small-size silicon wafers.

2. With the expansion of fund-raising projects, the company's position in the small-size market will be more stable, and based on the company's excellent profitability in the past few years, we believe that the small-size business will provide the company with steady growth.

3. In terms of 8-inch semiconductor wafers, the company already has patent coverage, and 8-inch products are also one of the company's fundraising projects. When 8-inch products are successfully introduced to the market, the company's growth space will be further opened.

4. From 2021 to 2023, we estimate that the operating income of the company will be 426, 557, 000, 000 Coverage for the first time, giving a "overweight" rating.

Comments:

Zhejiang Zhongjing Technology Co., Ltd., which covers silicon rods and wafers, was founded in 2010, listed on the new third board in 2014 and delisted in 2017, and successfully listed on the motherboard on December 18, 2020. The controlling shareholder and actual controller of the company are Xu Yijun and Xu Wei, who are brothers and actors, holding a total of 37.56% of the shares of the company as of March 31, 2021.

The company's main business is semiconductor silicon material research and development, production and sales, the main products include semiconductor silicon rods and semiconductor silicon wafers, widely used in the manufacture of all kinds of discrete devices. The company's product range covers 3'6-inch, N-type / P-type, 0.0008 Ω cm~100 Ω cm resistance range of silicon rods and grinding wafers, corrosion wafers, polishing wafers, etc., the final applications include consumer electronics, automotive electronics, household appliances, communications security, green lighting, new energy and other fields.

Semiconductor silicon rods can be grown by single crystal preparation methods such as Czochralski method or zone melting method, and silicon wafers are formed after slicing, chamfering, grinding and other silicon wafer processing processes. Some of the silicon rods produced by the company are sold directly to the outside world, and the other part is sold after the company has produced semiconductor silicon wafers.

The share of silicon revenue has increased, and the gross profit margin of each business has continued to rise. In 2020, the company achieved revenue of 273 million yuan, of which semiconductor silicon rod revenue was 79 million yuan, an increase of 3% over the same period last year; semiconductor silicon wafer revenue was 190 million yuan, up 31% from 2016 to 70%. The company's gross profit margin has continued to rise since 2016, with gross margins of 47.9% for silicon wafers and 51.4% for silicon bars in 2020, 13 percentage points higher than in 2016 and 18 percentage points higher than in 2016. The rising trend of gross profit margin is mainly due to technological research and development and process improvement, which not only increases the added value of products, but also improves production efficiency; in addition, the cost of upstream raw material polysilicon has also decreased.

Based on the small size market, layout 8-inch products

Semiconductor wafers, also known as silicon wafers, are the most important raw materials for the manufacture of semiconductor products. According to SEMI, the global wafer shipping area in 2020 was 12.4 billion square inches, up 5% from a year earlier, and sales were $11.2 billion, roughly the same as in 2019.

Silicon wafers can be classified according to different standards. According to size, silicon wafers can be divided into small sizes of 6 inches or less (2, 4, 5, 6 inches), 8 inches and 12 inches. At present, the largest shipping area is 12 inches. Generally, 12-inch or 8-inch silicon wafers are used in the production of large-scale integrated circuits, and 3-8-inch silicon wafers are used in the production of discrete devices. The company's current products are mainly in small sizes of 6 inches or less.

According to the type of process, silicon wafers can be divided into grinding wafers, polished wafers, epitaxial wafers and so on. Grinding wafer is a kind of ground single crystal silicon wafer, which removes the damage layer on the chip surface and effectively improves the curvature, flatness and parallelism of single crystal silicon wafer. It is mainly used in the manufacture of semiconductor discrete devices. A polished wafer is a kind of polished single crystal silicon wafer, which polishes the ground silicon wafer to reduce the surface roughness of the silicon wafer to obtain a bright and smooth surface, which can be used in the manufacture of semiconductor discrete devices and integrated circuits. The epitaxial wafer is a kind of epitaxial single crystal silicon wafer, which is formed by the epitaxial growth of thin films on the substrate surface, which can be used in the manufacture of semiconductor discrete devices and integrated circuits. At present, the company's silicon wafer products are mainly grinding wafers, and the focus of fund-raising projects is grinding wafers and polishing wafers.

The proportion of small-size silicon wafers is low but stable, and there are many domestic participants. The main application fields of 3-inch 6-inch silicon wafers are power devices such as diodes, transistors, thyristors, as well as mature medium-and low-end discrete device products such as sensors and optoelectronic devices, which account for a small but stable share of the wafer shipping area. In recent years, it has been maintained at about 10%, and the main production capacity is concentrated in Chinese mainland. There are a large number of domestic 3-inch 6-inch silicon production enterprises, the industry structure is relatively scattered, and some enterprises are only silicon wafer processors, so they need to purchase single crystal silicon bars for silicon wafer processing and production. There are many kinds of specifications of semiconductor silicon wafers, involving different sizes, resistivity ranges, conductive types and so on. Silicon material manufacturers need to have large-scale multi-variety product supply capacity in order to meet customer demand and achieve good economic benefits at the same time. At present, the domestic enterprises that can provide 6 inches or less silicon wafers are mainly Zhongjing Science and Technology, Tianjin Central, Kunshan Zhongchen and other enterprises.

Expand production capacity to consolidate small-size market position, layout 8-inch products. In the future, with the development trend of semiconductor discrete devices towards miniaturization, power and integration, higher technical and functional requirements for silicon wafers are put forward. at the same time, suppliers who have the technology and production capacity of silicon rods and wafers and can supply silicon materials on a large scale will occupy a larger market share. Among the listed investment projects of the company, the 615 million yuan investment project of monocrystalline silicon wafers for high-end discrete devices and ultra-large-scale integrated circuits is mainly to expand production capacity. The construction period of the project is about 30 months and the production capacity is about 4 years. After the project reaches production, it is expected to add 6 million 4-6-inch polished wafers, 4 million 4-6-inch polished wafers and 600000 8-inch polished wafers each year, totaling 1060 million single crystal silicon wafers. The company will produce 2557 million single crystal silicon wafers in 2020. The 8-inch demand is more than the small size, and selling 8-inch polishing wafers can bring more revenue to the company. In terms of technical feasibility, there is technical commonality in the production of 6-8-inch silicon wafers, and the company's existing patents also cover 8-inch silicon wafer production technology. We think the company is more likely to make 8-inch polished wafers.

The scale of income has reached a new high, and profitability continues to improve.

With the exception of 2019, revenue and profits continued to be at a new high. Affected by the global semiconductor boom in 2019, the company's revenue decreased by 12% compared with the same period last year. In addition, the company's revenue and return net profit have continued to reach new highs since 2015. In 2020, the company achieved 273 million yuan in revenue, an increase of 22% over the same period last year, and a net profit of 87 million yuan, up 30% from the same period last year. According to the company's semi-annual report of 2021, the company's net profit of returning to its mother in the first half of 2021 was 7000-75 million yuan, an increase of 83.06% and 96.13% over the same period last year.

The profitability continues to improve, and the quality of earnings is better. As the company continues to carry out technological research and development and process improvement, the company's profitability continues to improve, the gross profit margin increased from 34% in 2016 to 48% in 2020, and the net profit margin increased from 20% in 2016 to 32% in 2020, both by more than 10 percentage points. In the past two years, the company's net profit cash content is very high, maintained at about 100%, and more than 90% of the net profit comes from recurrent income.

Financial forecasts and investment recommendations

We make assumptions about the company's core data based on the following logic:

1. With the revamping of the equipment and the commissioning of the new production line, the company's capacity will be gradually released in the next few years. It is expected that the monocrystalline silicon wafer business revenue will continue to grow, and the proportion of the company's revenue will further increase.

two。 The production capacity of the company's monocrystalline silicon rods is still increasing, but more silicon rods are used for internal production of silicon wafers. We expect the growth rate of business revenue of silicon rods to be slower than that of silicon wafers, and their share of revenue continues to decline.

3. The semiconductor industry is booming in 2021, and the price of silicon materials continues to rise. We expect the company's gross profit margin to increase in 2021 and decline slightly in 2022 and 2023.

4. R & D rates remain unchanged, while rates for other periods decline steadily as a result of revenue growth.

Based on the above assumptions, we estimate that the operating income of the company from 2021 to 2023 will be RMB 732 million, and the net profit of return to the parent will be RMB 1.52 + 1.95 / 250 million, respectively, and the corresponding PE will be times that of 58-45-35. We selected Shanghai Silicon Industry and Lion Micro, which produces 8-inch or 12-inch semiconductor wafers, for comparison. The company's current valuation is relatively low. Considering the company's leading position in small-size semiconductor wafers and excellent profitability, we cover it for the first time and give it an "overweight" rating.

Risk hint

1. Systemic risks caused by macroeconomic fluctuations, major natural disasters, infectious diseases, etc., resulting in lower-than-expected downstream demand. 2. The expansion progress of fund-raising projects is not as expected.

The research and development of 3-inch and 8-inch semiconductor silicon wafers is not as expected.

4. The global trade conflict may lead to the lower-than-expected localization process of the semiconductor industry chain. 5. The management risk of the enterprise itself may lead to lower-than-expected performance.