Affected by the year-on-year decline in the volume and price of germanium products, the company's performance changed from profit to loss. Benefiting from the increase in the proportion of gallium arsenide products used in RF devices, the gross margin of gallium arsenide increased sharply to nearly 60% over the same period last year. As the gallium arsenide business entered a stage of volume growth and supply and demand improved, germanium prices bottomed out and picked up, and the company's performance entered a period of rapid growth. Maintain the company's target price of 12.00 yuan for the next year, corresponding to a market capitalization of 7.8 billion yuan, and maintain the “buy” rating. Dragged down by the volume and price of germanium products, the annual results turned into losses. In 2019, the company achieved operating income of 418 million yuan, a year-on-year decrease of 10.02%. Net profit from the return mother/net profit deducted from non-return mother/net operating cash flow was -0.59/-0.61/-104 million yuan respectively, all of which were converted from profit to loss over the previous year. Main reasons: 1) The average price of germanium ingots in 2019 was 7,498 yuan/kg, down 19.9% year on year; 2) production of germanium processed products fell 30%-50% year on year; 3) R&D expenses and financial expenses increased 87.0%/88.2% year on year, respectively. Production and sales of deep-processed germanium are weak, and 5G construction is expected to drive a rebound in germanium prices. Affected by various factors such as the international and domestic economic situation and downstream demand, the sales volume of the company's material-grade/photovoltaic/infrared/fiber-grade germanium products in 2019 was 25.3 tons/74,900 tablets/4.33 tons/18.47 tons, respectively, +16.8%/-52.5%/-42.5%/-37.4% over the same period. Corresponding operating income fell 0.9%/36.3%/52.4%/29.6% year on year, respectively, and gross margin fell to 16.36%/14.2%/-30.9%/16.1%. The overall gross profit of the germanium sector was 337 million yuan, a sharp decrease of 66 million yuan over the previous year. Driven by 5G construction, the pattern of germanium supply and demand driven by optical fiber is expected to improve, and germanium prices are expected to bottom out and rebound. According to the company's production plan, gross profit of the germanium sector is expected to be 54 million yuan in 2020, up 45.9% year on year. The gross profit of gallium arsenide exceeded expectations, driving the company's performance to grow rapidly in the future. In 2019, the company sold 71,600 gallium arsenide monocrystals (equivalent to 4 inches), an increase of 10.6% over the previous year. Among them, the proportion of products used in RF devices increased, and gross margin increased sharply by 121.2pct to 59.7%. Semiconductor materials contributed 0.25 million yuan to gross profit for the year, accounting for 37.1% of the company's gross profit. The company currently has a production capacity of 800,000 gallium arsenide tablets, benefiting from the autonomy and control of the semiconductor industry chain. It is estimated that the company's gallium arsenide monocrystals will sell 32.29/650,000 pieces in 2020/2021. It is estimated that the gross profit of the semiconductor materials sector in 2020 will be 190 million yuan, a sharp increase of 665% over the previous year, which is expected to drive the company's performance from loss to profit. Risk factors: germanium prices fluctuate, sales of germanium products fall short of expectations, sales of gallium arsenide semiconductors fall short of expectations. Investment advice: It is expected that the germanium supply and demand pattern will improve, and germanium prices are expected to bottom out and rebound. The production capacity of gallium arsenide semiconductors is sufficient, showing a rapid growth trend, and the company is expected to turn losses into profits. We estimate that the company's net profit for the period 2020-2021 will be 0.37/105 million yuan (the original forecast was 0.40/100 million yuan, adjusted according to germanium prices), and an additional 2022 forecast value will be 196 million yuan, corresponding to the 2020 2022 EPS forecast of 0.06/0.16/0.30 yuan, respectively. Maintain the company's target price of 12.00 yuan for the next year (based on a PEG valuation of 1.6 times in 2020), corresponding to a market capitalization of 7.8 billion yuan, and maintain the “buy” rating.