Incident: The company issued the “Notice on Foreign Investment of Wholly Owned Subsidiaries” on June 7. The announcement stated that Hunan Sanan has set up a wholly-owned subsidiary, Chongqing Sanan Semiconductor Co., Ltd., in Chongqing, with an estimated total investment of RMB 7 billion.

Invest in the establishment of a wholly-owned subsidiary in Chongqing to further expand production and layout of the silicon carbide product line: This foreign investment project is for Hunan San'an to establish Chongqing San'an Semiconductor Co., Ltd., a wholly-owned subsidiary in Chongqing. The total investment is expected to be RMB 7 billion, which will be invested one after another according to the progress of the joint venture. The registered capital of the project is 1.8 billion yuan. Hunan San'an paid in installments with its own funds and invested 5-10 billion yuan in the initial phase. It is mainly engaged in the production of silicon carbide substrates. After delivery, it plans to produce 480,000 8-inch silicon carbide substrates per year. The company said that the investment project aims to expand production capacity to ensure the use of the joint venture substrate, which will help expand the company's revenue scale, increase the product market share and the company's profitability.

Benefiting from the boom in photovoltaics and new energy, the power electronics and optical technology business progressed rapidly: According to the company's 2022 report, 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. According to the company's 2022 annual report, Hunan San'an 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 automotive-grade 1200V 16mΩ MOSFET chip has undergone module verification at 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 has been gradually improved: 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 share of segments in the LED industry is expected to continue to expand. According to the company's 2022 annual report, 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.

Maintain the “increase in holdings” rating: the company continues to consolidate and strengthen its position and influence in the field of power electronics to accelerate the development of the compound semiconductor integrated circuit 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. The corresponding EPS is 0.39 yuan, 0.53 yuan, and 0.60 yuan respectively, and the corresponding PE is 52X, 38X, and 34X 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.