Incidents: The company released its 2022 annual report and the first quarter report of 2023 on April 27. In 2022, the company achieved revenue of 13.222 billion yuan, an increase of 5.17% over the previous year; the net profit of the mother was 685 million yuan, a decrease of 47.83% over the previous year; after deducting non-net profit - 310 million yuan, a decrease of 159.51% over the previous year. In Q1 of 2023, the company achieved revenue of 2,908 million yuan, a year-on-year decrease of 6.42% and a decrease of 9.43%; Guimu's net profit was 214 million yuan, a year-on-year decrease of 50.22%, an increase of 170.78% over the previous year; after deducting non-net profit of -181 million yuan, a year-on-year decrease of 265.78%, an increase of 57.24% over the previous year.

Increased inventories affected profit margins, and Q1 performance improved month-on-month: In 2022, market demand in the traditional LED sector was sluggish, the company's capacity utilization rate was insufficient, LED chip business sales revenue declined, and inventory growth affected profit margins. Net inventory value increased 25.75% compared to the same period in 2021. The increase of 1,189 million yuan was mainly due to an increase of 673 million yuan in the net inventory value of Sanan in Quanzhou and an increase of 412 million yuan in the net inventory value of Sanan in Hunan.

The company's overall revenue scale continued to grow. By business, the LED business achieved overall sales revenue of 10.175 billion yuan, and the integrated circuit business achieved overall sales revenue of 3,047 billion yuan. The company's consolidated gross margin in Q23 was 16.87%, down 5.06 pct from the previous year and up 2.57 pct from the previous year; the net interest rate was 7.34%, down 6.46 pct from the previous year, up 16.74 pct from the previous year. In terms of expenses, the company's sales, management, R&D, and financial expenses rates in Q23 were 1.42%/6.85%/4.75%/2.60%, respectively, and the year-on-year changes were 0.20/1.22/1.11/0.15pct respectively.

Benefiting from the boom in photovoltaics and new energy, the power electronics and optical technology business progressed rapidly.: In 2022, the company continued to develop business around the core business of compound semiconductors, and the power electronics and optical technology business progressed rapidly. The company's PD chips account for more than 50% of the domestic market. 10G DFB chips have been delivered in batches to mainstream customers in the market, and multi-wavelength VCSEL products mainly used in data centers have been developed and delivered in batches. In 2022, San'an, Hunan achieved sales revenue of 639 million yuan, an increase of 909.48% over the previous year.

The second phase of the Hunan San'an project will be completed in 2023, reaching an annual production capacity of 360,000 pieces after delivery. The company's silicon carbide 80mω/20mΩ products have been ordered in batches on the photovoltaic client, and the vehicle charger client is in the verification and introduction stage; the car-grade 1200V 16mΩ MOSFET chip has been module verified by strategic customers and is expected to be officially put into mass production in 2024. The company's silicon carbide MOSFET OEM business has cooperated with leading new energy vehicles and supporting companies. The total amount of chip strategic procurement intent agreements signed with a well-known car company reached 3.8 billion yuan, and another important customer order amount was 1.9 billion yuan. Currently, Suzhou Sko Semiconductor, a joint venture between Hunan San'an and Ideal, has completed infrastructure construction, and the equipment has entered the installation and commissioning stage. Benefiting from the increased penetration rate of downstream markets such as photovoltaics and new energy vehicles, the company's sales revenue and profitability are expected to increase further as Suzhou Sko Semiconductor produces 2.4 million silicon carbide half-bridge power modules per year and successfully releases additional production capacity.

The share of high-end LED products continues to increase, and the integrated circuit business layout is gradually improving: as an important next-generation display technology, market demand for Mini/Micro LED is growing rapidly, and automotive lighting is also growing rapidly, driven by the NEV market. Products in the fields of plant lighting, special lighting, and UV/IR LED segments are widely used in medical, agricultural and other application fields, and the segment will account for an increasing share of the LED industry. In 2022, the company's high-end LED product business in the segments Mini/Micro LED, plant lighting, automotive lighting, ultraviolet, infrared, etc., expanded further, achieving a 47.23% increase in sales revenue over the same period in 2021. The company has successively improved its semiconductor integrated circuit business layout through multiple projects: 1) Quanzhou San'an Semiconductor Technology Co., Ltd.'s semiconductor R&D and industrialization phase I project is mainly engaged in gallium nitride, gallium arsenide and special packaging business. After the project was delivered, it added about 8.92 million pieces/year and 8.72 KKKK/year for special packaging. In 2022, it achieved revenue of 2,439 million yuan, an increase of 27.21% over the previous year, and net profit of 428 million yuan, an increase of 10.34% over the previous year. 2) The integrated circuit industrialization project of Quanzhou San'an Semiconductor Technology Co., Ltd. will engage in gallium arsenide radio frequency, filter and packaging business. It will achieve revenue of 160 million yuan in 2022, an increase of 460.60% over the previous year. 3) The semiconductor industrialization project of Hunan San'an Semiconductor Co., Ltd. is mainly engaged in the development and industrialization of third-generation compound semiconductors such as silicon carbide and silic-based gallium nitride. It has a silicon carbide production capacity of 12,000 pieces/month and silic-based gallium nitride 2,000 pieces/month. The equipment has been put into use, and production capacity is gradually being released. The company continues to lay out various integrated circuit businesses and actively increase the equipment utilization rate, and the revenue scale is expected to continue to expand.

First coverage, giving an “increase in holdings” rating: The company is mainly engaged in the development and application of compound semiconductor materials, with epitaxial films and chips involved in new semiconductor materials such as gallium arsenide, gallium nitride, silicon carbide, indium phosphide, aluminum nitride, and sapphire as its core business. Benefiting from demand driven by photovoltaics, new energy and other fields, the company is expected to further open up room for performance growth with the smooth release of new production capacity for many of the company's semiconductor projects. The company's net profit for 2023-2025 is estimated to be 1,959 billion yuan, 2,632 billion yuan, and 2,989 billion yuan respectively; EPS is 0.39 yuan, 0.53 yuan, and 0.60 yuan respectively; PE is 45X, 33X, and 30X respectively.

Risk warning: risk of falling inventory prices, release of new production capacity falling short of expectations, risk of technological innovation, risk of market competition.