San'an Optoelectronics released a report for the third quarter of 2022: in the first three quarters of 2022, the company realized operating income of 10.012 billion yuan, an increase of 5.04% over the same period last year, a net profit of 987 million yuan, a decrease of 23.27% over the same period last year, and a net profit of 113 million yuan, a decrease of 81.61% over the same period last year.

Main points of investment

Consumer market demand shrinks, traditional business is under short-term pressure

Since 2022, the epidemic situation has been repeated, the consumer market demand has shrunk, the sales of the company's traditional LED products are weak, and the company's overall performance is under pressure. In a single quarter, 2022Q3 achieved revenue of 3.25 billion yuan, a decrease of 4.90% from the same period last year, 11.09% from the previous month, and a net profit of 55 million yuan from the previous quarter, a decrease of 86.36% from the same period last year and 89.08% from the previous year. In terms of profitability, Q3 single-quarter gross profit is 15.14%, month-on-quarter-4.70pct, gross profit of the first three quarters is 18.96%, month-on-1.84pct, net profit is 9.86%, month-on-month-3.92pct, which results in a decrease in net profit due to the fact that some of the company's new projects are still in the profitability improvement period. In terms of expenses, the company achieved sales, management and financial expenses rates of 1.18%, 9.61% and 2.45% respectively in the first three quarters of 2022. The financial expenses have increased, which is due to the increase in the overall operating capital needs of the company, and the amount of borrowing has increased accordingly. In terms of R & D expenses, the R & D cost was 396 million yuan, and the R & D expenditure rate reached 3.95%, an increase of 18.97% over the same period last year. The gradual increase in R & D expenses and share is mainly due to the company's increased R & D investment in integrated circuits, Mini/MicroLED chips, infrared / ultraviolet LED and other subdivided fields.

Traditional LED is under short-term pressure, high-end LED is rising against the trend.

The company is the largest and leading panchromatic ultra-bright LED epitaxy and chip industrialization manufacturer in China. According to Yidu data, in the competition pattern of China's LED chips in 2020 (calculated by total sales), San'an Optoelectronics accounted for 37.66%, ranking first. Affected by the external environment, the company's traditional LED business fell short of expectations in the first half of the year, but the scale and proportion of LED high-end business such as Mini/Micro LED, plant lighting, automotive lighting, ultraviolet and infrared continued to increase, and sales revenue increased by 84.8% over the same period last year.

Subdivided, Mini LED application access to international leading customers continue to promote, sales scale climbing month by month, domestic customers in TV, notebook Mini LED backlight solutions have entered small batch production; UV with its excellent germicidal ability is rapidly promoting commercialization; plant lighting high-power high-end products domestic demand stability, and access to international customers' favor; the future Quanzhou Sanan and Hubei Sanan capacity will continue to release. The market penetration of the LED industry, especially high-end applications such as Mini LED, is still increasing, and the space for technological progress and market space is still large in the medium and long term. With the gradual clearance of backward production capacity in the industry, the company further develops the downstream market, coupled with the implementation of cost control and efficiency, and further improves the upstream and downstream supply chain coordination mechanism, the company's scale and share in the high-end LED application market are expected to be further enhanced.

Integrated circuit production capacity continues to expand, SiC vehicle specification-level business accelerate the company engaged in radio frequency front-end, power electronics, optical technology compound semiconductor integrated circuit business, revenue scale is growing with the capacity climbing. According to the company's semi-annual report, gallium arsenide RF production capacity has been expanded to 12000 wafers / month, optical technology production capacity 2000 wafers / month, Hunan Sanan power electronics silicon carbide production capacity 6000 wafers / month, power electronics silicon-based gallium nitride production capacity 1000 wafers / month.

SiC vehicle specification business is accelerating. In August 2022, Hunan Sanan and Li Auto Inc. jointly built a research and production base for silicon carbide power semiconductors in Suzhou, Jiangsu Province. In September, Hunan Sanan released the latest 1200V silicon carbide MOSFET series, including 1200V 80m Ω / 20m Ω / 16m Ω, which aims to achieve an all-round breakthrough in complete vehicles and new energy automobile parts in 2023. In November, Hunan Sanan signed a "Strategic Purchasing intention Agreement" with the demand side (mainly engaged in the new energy vehicle business). The demand side will purchase silicon carbide chips from Hunan Sanan every year from 2024 to 2027, with an estimated total amount of 3.8 billion yuan (including tax), which will be applied to the driver of new energy vehicles. We believe that integrated circuits are a vigorously developed industry in China, with strong domestic substitution, with the growth of downstream demand and the development of the company's customers, as well as the rapid growth of the new energy vehicle industry, the company's integrated circuit business market scale and market share are expected to further improve.

Profit forecast

The forecast company's income from 2022 to 2024 is 136.15 yuan, 156.35 yuan and 18.531 billion yuan respectively, and the EPS is 0.26,0.36,0.41 yuan respectively. The current stock price corresponding to PE is 78,56 and 49 times respectively. It covers for the first time and is given a "buy" investment rating.

Risk hint

The risk of price fluctuation of major raw materials, the risk of price fluctuation of major products, the downside risk of business outlook, the risk of slower than expected progress of capacity expansion, the risk of intensified competition in industry, the risk of environmental regulation and control of industrial policy, the risk of public health events, and so on.