Incident: The company released the first quarter report of 2023, achieving revenue of 632 million yuan, a year-on-year decrease of 16.4%, and the net profit of the mother was 34 million yuan, a year-on-year decrease of 85.53%.

Q1 Revenue and profit were under pressure, and profitability bottomed out and stabilized. The first quarter of 2023 was affected by factors such as the slow recovery in downstream consumer demand. The company's revenue continued at the level of the fourth quarter of 2024. At the same time, since 12-inch silicon wafers were in a period of rising production capacity, excessive fixed costs affected short-term profits. In terms of profitability, the company's gross margin and net interest rate stabilized month-on-month in the first quarter, reaching 29.67% and 2.89% respectively, up 0.27 pp and 1.6 pp, respectively. In terms of cost rate, the company's sales/management/R&D/financial expenses ratio for the first quarter of 2023 was 0.42%/3.88%/10.33%/6.27%.

The shareholding structure of the subsidiary was optimized, and the 12-inch silicon wafer project progressed steadily. According to SEMI data, global silicon shipments increased 3.9% and sales increased 9.5% in 2022. In the first half of 2022, the company's Quzhou 6-8 inch silicon wafer production line and Ningbo silicon wafer production line were in full production. Demand for silicon wafers declined in the second half of the year, and the company's inventory increased. In terms of 12-inch silicon wafers, the company completed the merger and acquisition of the subsidiary Jin Ruihong Microelectronics with Jiaxing Jin Ruihong in June 2022. In December, the company successively acquired 150 million yuan of Jin Ruihong Microelectronics and 94.5 million yuan of Jin Ruihong Technology to optimize the subsidiary's governance structure. At present, the company's 12-inch silicon wafer technology has covered logic and memory circuit technology nodes above 14nm, expanded image sensor devices for the technical nodes required by customers, and at the same time achieved a heavy-duty, light-blended, bi-blended layout.

The gross margin of power semiconductors increased in 2022, and IGBT entered client-side verification. In 2022, the company's power semiconductor business revenue reached 1.08 billion yuan, an increase of 7.1% over the previous year, and gross margin reached 56.31%, an increase of 5.36 percentage points over the previous year. Focusing on the two major categories of photovoltaics and vehicle regulations, the company prioritized expanding the scale of groove products, steadily increasing the proportion of FRD, and actively developing IGBT products, offsetting the slump in demand for some consumer electronics power devices through the growth of new energy products. The company's photovoltaic products grew at a high level, accounting for 45%-49% of sales, 86% year-on-year increase in groove chip shipments, and 400% increase in FRD products. IGBT products completed technical development and began client-side verification.

Compound semiconductors are being thoroughly deployed, and automotive regulation products are shipped in batches. The company's compound semiconductor business achieved revenue of 0.5 billion yuan in '22, an increase of 14.9% over the previous year. The subsidiary Liangdongxin is in a leading position in the field of compound semiconductor RF chips. After early technology accumulation and customer certification, the company realized the application of InGap HBT technology in 5G and WiFi wireless, developed advanced double 0.15 micron GaAs PHEMT process technology. 3D lasers (VCSELs) filled many gaps in the country and passed IATF16949 vehicle regulations certification.

Profit forecasts and investment recommendations. EPS is expected to be 1.04 yuan, 1.39 yuan, and 1.79 yuan respectively in 2023-2025. The compound growth rate of net profit returned to the mother is expected to reach 20.8% in the next three years, maintaining the “buy” rating.

Risk warning: industry sentiment is sluggish, downstream demand falls short of expected risks, expansion of 12-inch silicon wafer production capacity falls short of expected risks, downstream customer verification progress falls short of expected risks, etc.