Taiji Industrial announced its report for the third quarter of 2020. It achieved revenue of 12.6 billion yuan in the first three quarters, an increase of 1% over the previous year; Guimu achieved net profit of 5.2 billion yuan, an increase of 15% over the previous year.
Management analysis
The impact of the epidemic has been eliminated, and profit performance is superior to revenue: Due to the decline in EPC orders in 2019 and the impact of the epidemic on construction progress in the first half of 2020, we expect EPC revenue to decline slightly year-on-year in the first three quarters of this year. As the domestic epidemic slows down, we believe that the negative factors that have delayed the progress of plant construction have been eliminated. However, due to changes in revenue structure, the company's gross profit improved slightly, and gross margin for the first three quarters increased to 12.1% from 11.8% in the same period last year. At the same time, the company strengthened cost control. The sales expense ratio fell to 0.20% from 0.23% in the same period last year, and the management expense ratio fell to 2.68% from the same period last year. Therefore, against the backdrop of flat revenue year over year, Guimu's net profit still grew 15%.
General contracting orders have accelerated, and revenue growth can be expected in 2021: In 2020, the company announced the signing of Geko's 12-inch CIS industrialized EPC project and the Jiangsu Renqi chip industrialization EPC project. We believe that in the context of an accelerated increase in chip self-sufficiency in China, demand for semiconductor factory construction may continue to flourish. The company's general contracting orders may increase compared to 2019, and revenue growth in 2021 can be expected to increase.
Future growth momentum: We believe that the adjustment in server demand in the first quarter of 2021 may end. Currently, demand for laptops and game consoles continues to be booming, and we are optimistic about the DRAM/3D NAND memory industry sentiment.
Coupled with Changjiang Storage and Hefei Changxin's production expansion plans over the next five years, it is beneficial to Taiji's memory sealing and testing business.
Investment advice
We maintain our profit forecasts for 2020-2022 at $690 million, $1.0 billion, and $1.31 billion, respectively. Although Taiji's profit growth slowed in 2020, the compound profit growth rate will reach 22% in the next 5 years. We will maintain the company's “buy” rating and 12-month target price of 15 yuan.
Risk warning
Business risk of excessive customer concentration; risk of memory decline cycle to cash cost price; risk of inflexible management mechanisms of state-owned enterprises; performance risk due to weak follow-up orders in cleanroom engineering and design business