Incident: The company released its 2022 annual report on March 14. In 2022, the company achieved operating income of 3,286 million yuan, -9.23% year on year; achieved net profit of 36 million yuan, -84.85% year on year; achieved net profit of 15 million yuan after deducting non-net profit, -91.26% year on year. In Q4 2022, the company achieved operating income of 908 million yuan, -3.54% year on year, +16.42% month on month; realized net profit of -24 million yuan, -214.23% year on year, -181.21% month on month; realized net profit of -32 million yuan after deducting non-net profit, -379.03% year on year and -253.21% month on month.

Downstream demand is weak, and short-term performance is under pressure: Affected by external factors such as the global macroeconomic downturn and international geopolitical conflicts, downstream demand is weak, and the copper cladding industry as a whole is on a downward path. Combined with factors such as low operating rates and increased competition in the industry, the volume and price of the company's products fell sharply, leading to a decline in revenue in 2022. The company's gross margin in 2022 was 12.98%, year-on-year - 3.53 pcts; net profit margin was 1.24%, year-on-year - 5.40 pcts.

Mainly, the reduction in the price of the company's copper-coated plate products was greater than the reduction in the price of raw materials, which led to a decline in gross margin. In terms of expenses, sales/management/R&D/finance expenses in 2022 were $0.79/1.13/2.02/028 million, compared to +2.17%/+10.92%/+37.74%/-52.79%. This was mainly due to the increase in operating expenses of the Zhuhai company due to the increase in operating expenses. The company continued to increase R&D investment and the rise in employee remuneration led to a sharp increase in R&D expenses. The increase in exchange income and interest income led to a sharp drop in financial expenses.

High-end CCL and aluminum-plastic film production capacity is gradually being released, and there is plenty of room for domestic substitution: according to statistics from the China Business Industry Research Institute, the top ten global copper-clad board manufacturers in 2022 were mainly Japanese and Taiwanese companies. Only two in mainland China entered the top ten, and there is still plenty of room for domestic enterprises to grow. The company publicly issued convertible bonds in January 2022, raising 570 million yuan of capital, of which it plans to invest 400 million yuan to raise 400 million yuan for high-grade copper-clad plate projects with an annual output of 24 million. During the reporting period, the first phase of the Zhuhai base project with an annual output of 24 million high-grade copper-clad plates was partially put into operation as planned, and various production technical indicators such as production volume and quality reached the expected targets. The company's main products have initially switched to high-grade copper-clad plates, and the new production capacity is an expansion of high-grade copper-clad plates. The additional production capacity effectively increased the company's supply capacity for high-grade copper-clad plates, optimized the product structure to develop in the direction of high-end commercialization, helped the company break the industry barriers of high-end CCL and further enhance its position in the industry. Aluminum-plastic film for lithium battery soft packs is the company's strategic new product. It is a key material for lithium battery cell soft pack packaging. It is widely used in 3C digital, power, energy storage and other fields. With the rapid increase in battery shipments in the power battery and energy storage sector, overall soft pack lithium battery shipments will grow rapidly. This in turn has led to an increase in aluminum-plastic film shipments. At present, the company's aluminum-plastic film product line has completed the construction of an aluminum-plastic film plant for lithium battery packaging with an annual output of 36 million square meters. It has entered the trial production and customer inspection stage. At the same time, it has actively carried out market layout, achieved large-scale sales in the fields of high-end consumer electronics, light power, energy storage, etc., and carried out testing and application development cooperation with leading power battery manufacturers.

Benefiting from the high demand for advanced downstream packaging substrates, CBF opened a profit ceiling: with the continuous development of the Internet of Things and AI technology, high-performance chips with high computing power have spawned an increase in demand for advanced packaging substrates in the PCB industry, which in turn drives demand for upstream advanced packaging substrate materials to rise. CBF is a key packaging material that can be applied to important application scenarios such as FC-BGA high-density package substrates in advanced packaging fields. Currently, it is mainly monopolized by Japanese merchants and is heavily dependent on imports. According to Prismark's forecast, the FC-BGA carrier board market will reach 12.1 billion US dollars in 2026, with a CAGR of 11.6% in 2021-2026. The company has developed a variety of CBF laminated insulators with high reliability, low CTE, high Tg and low Df, and has carried out product verification on many PCBs and end customers. The company is expected to fully benefit from the future growth in demand for FC-BGA substrates brought about by high-performance chips with high computing power, meet the demand for advanced downstream packaging technology, and open up the company's profit ceiling.

First coverage, giving a “increase in holdings” rating: The company is a leading copper coated plate supplier in China, mainly engaged in the design, R&D, production and sales of products such as copper-coated plates and adhesives, composites and membrane materials. At present, it has integrated product line resources to form the three major divisions of copper-clad plates, composites and membrane materials. The products are widely used in 5G communications, servers, data centers, semiconductor packaging, new energy vehicles, smart home appliances, medical equipment and other fields. The company's copper-clad plate business is expected to further increase its market share through production expansion, and there is still plenty of room for high-end products. The aluminum-plastic film production expansion project went smoothly and is expected to fully benefit from the increase in shipments of new energy power batteries. The successful verification of CBF end customer products is expected to become the company's new profit growth point in the future. The company's net profit from 2023 to 2025 is estimated to be 99 million yuan, 263 million yuan, and 350 million yuan. EPS is 0.70 yuan, 1.85 yuan, and 2.47 yuan respectively, and the corresponding PE is 47X, 18X, and 13X respectively.

Risk warning: Risk of fluctuations in raw material prices, downstream demand falling short of expectations, production expansion falling short of expectations, and the impact of exchange rate fluctuations.