Key points of investment:

2023Q1: Operating income was 52.14 million yuan, -63% year on year, net profit of the mother was 1.08 million yuan, -124% year on year.

In 2021-2022, the cost of electronic grade polysilicon as an upstream raw material rose 30%, and the company's gross margin declined due to this.

The gross profit margin of 2023Q1 in a single quarter was 33%, an increase of 3 pct over the previous quarter, and is still relatively low.

Expansion of production strengthens the leading position of semiconductor etched silicon materials. The main products of Shengong Co., Ltd. are monocrystalline silicon materials for etching the upper and lower electrodes and outer rings of equipment. The material market size is about 4-5 billion US dollars, and the silicon electrode market is about 10-15 billion US dollars.

The core team of Shengong has more than 20 years of overseas experience. The company's technologies such as magnetic-free large-diameter monocrystalline silicon manufacturing technology, solid-liquid coexistence interface control technology, and heat field size optimization technology are at the international advanced level. In 2021, the proportion of large-diameter silicon products over 16 inches increased from 27.71% in 2021 to 28.95% in 2022. The production capacity of silicon materials reached about 500 tons/year in January 2023, an increase of 10%, and production capacity will expand to 1000 tons/year in 2023.

In the silicon components sector, it is expected to become a leading domestic silicon electrode company. In 2021, the company established two component plants in the north and south of Jinzhou, Quanzhou, with supporting capabilities for the entire industry chain, from etching silicon materials to silicon electrodes. The product is used on a 12-inch plasma etcher and has been delivered in small batches; high-precision equipment for chemical-mechanical polishing (CMP) was developed in 2022. Polycrystalline silicon structural products are generally 22 inches or more in diameter. Samples and evaluations began to be sent to customers in 2022, and stable supply has been achieved through evaluation by a certain customer.

Large-sized semiconductor silicon wafers achieved revenue of tens of millions of yuan. The IPO fund-raising project of Shengong Co., Ltd. added an annual output of 1.8 million 8-inch semiconductor polishing sheets and 360,000 semiconductor padding sheets. A production line with a monthly capacity of 50,000 pieces has been built, and the equipment ordered in the second phase of 100,000 pieces/month has entered the market one after another; the 8-inch test silicon was officially supplied to Japanese customers. The 8-inch light-blended high-resistance silicon with low defects is progressing smoothly on the client side.

The proportion of domestic customers increased. Since global etcher manufacturers and silicon electrode manufacturers for etching are located in Japan, South Korea, and the United States, the main customers of Shinko Co., Ltd. include international companies such as Mitsubishi Materials, SK Chemical, CoorsTek, and Hana. The share of domestic revenue rose from 1.9% in 2019 to 13% in 2022.

Lower the profit forecast and maintain the “buy” rating. The decline in the 2023Q1 semiconductor material boom caused 23Q1 revenue and profit to fall short of Shenwan's previous expectations. As the company's silicon materials sector lags behind the semiconductor cycle by about half a year, and the high cost of polysilicon materials continues to affect gross profit margins in 2023. The 2023-24 return net profit forecast was lowered from 200/270 million yuan to 15/ 230 million yuan, adding 330 million yuan to the 2025 forecast. 2023/24PE 43/28X, lower than the average PE of companies with comparable materials is 119/55X. I am optimistic about the company's medium- to long-term development of silicon materials and parts and maintain the “buy” rating.

Risk warning: The semiconductor boom cycle is declining, the yield of new products falls short of expectations, and shareholders' holdings are falling short of expectations, causing changes in stock prices.

On March 31, 2023, Shengong Co., Ltd. received an inquiry letter from the Shanghai Stock Exchange after the fact review of the 2022 annual report, and issued an announcement response to the inquiry letter on April 20, inviting investors to pay attention to the risks.