Incident: The company released its 2022 annual report and the report for the first quarter of 2023. The company achieved revenue of 655 million yuan for the full year of 2022, an increase of 35.44% over the previous year; realized net profit of 44 million yuan, a decrease of 36.83% over the previous year; and realized net profit of 41 million yuan, a year-on-year decrease of 33.65%. The company achieved revenue of 136 million yuan in Q1 2023, a year-on-year decrease of 3.28% and a decrease of 30.80%; realized net profit of -0.3 billion yuan, a year-on-year decrease of 124.34% and a decrease of 190.19% from the previous month; and realized net profit of -0.04 billion yuan, a year-on-year decrease of 126.18% and a decrease of 242.71% from the previous month.

Low demand combined with a rise in production capacity indicates a decline in business profitability: in 2022, the company made new progress in customer development, production capacity at the Zhongshan base was gradually released, and operating income grew rapidly year-on-year. However, due to weak demand for global consumer electronics, the profitability of the company's main product, special equipment for flat panel displays, declined, putting pressure on the company's annual performance. The company's gross margin for the full year of 2022 was 31.54%, -12.34 pcts year on year; net interest rate was 6.55%, year on year -7.75 pcts. The main reasons for the decline in the company's gross profit margin and net interest rate in 2022 were: first, due to the slump in consumer electronics demand, the gross margin of special equipment orders for flat panel displays fell short of expectations; second, the Zhongshan base is still in the stage of climbing production capacity and has not achieved break-even, reducing the company's overall performance; third, the company continues to increase investment in research and development of new products and technologies related to the semiconductor equipment field.

In Q1 2023, the company's gross margin was 28.12%, -4.45 pcts year on year, -3.43 pcts month on month; net interest rate was -3.42%, -12.76 pcts year on year, -5.76 pcts month on month. Among them, Q1 gross margin declined year on year, mainly due to the recovery in demand in the panel industry falling short of expectations. In terms of expenses, the company's sales, management, R&D and financial expenses rates for the full year of 2022 were 10.25%/7.11%/10.90%/-0.62%, respectively. The year-on-year changes were -1.85/-0.59/-0.47/-0.04pcts, respectively. Among them, financial expenses in 2022 were -403,4841.77 yuan, a year-on-year decrease of 42.93%, mainly due to the increase in the US dollar exchange rate and the increase in exchange earnings.

New product development has made breakthroughs in many directions, and the display and semiconductor business go hand in hand: the company is mainly engaged in R&D, production and sales of special equipment for flat panel displays and semiconductor equipment. The main products are LCD display equipment, flexible OLED display equipment, VR/AR/MR display equipment, Mini/Micro LED equipment, and semiconductor-specific equipment. 1) In terms of LCD display equipment, in 2022, the company independently developed and designed 65-inch H-shaped and 88-inch RTP polarizer attachment production lines. The overall performance indicators of the production line reached industry-leading levels, effectively improving cleaning yield and stability. It also developed 75-inch terminal washing equipment after panel edging and 75-inch post-cutting disc brush cleaning equipment, which improved the rear section bonding yield and solved the problem of glass chips and detection interference on the back panel. In addition, in response to market demand for automotive display module assembly equipment, the company upgraded and iterated on the existing 12/17/24 inch offset production line to meet the yield requirements of high accuracy, high resolution, and high weather resistance of vehicle displays. 2) In terms of flexible OLED display equipment, in response to the development needs of folding products, the company has developed a 10/20-inch flexible OLED-POL/OCA/UTG/attachment production line based on existing small-size flexible OLED attachment technology to meet the application needs of other end products of the flexible OLED process. 3) In terms of VR/AR/MR display equipment, the company and the customer have jointly developed vacuum full lamination equipment under 2 inches and POL/OCA attachment equipment. At present, various functions have passed customer verification and entered the trial mass production stage; and developed and launched a 1-8 inch dedicated cleaning and offset line. At present, the accuracy and yield indicators of this VR line have passed verification and entered the mass production stage. In addition, the company has closely cooperated with polarizer manufacturers to develop various 17-inch POL+IQPS+QWP film attachment equipment. At present, various technical indicators have been verified by customers to achieve mass production. 4) In terms of Mini/Micro LED equipment, in 2022, the subsidiary Yitian Semiconductor launched the third-generation Mini LED mass transfer equipment, and the subsidiary Microchip Semiconductor developed third-generation Mini LED direct display product repair equipment and second-generation Mini LED backlight product repair equipment.

Furthermore, in order to expand the Mini LED market share, Microchip Semiconductor has developed miniLED appearance inspection equipment, Mini LED primer filling equipment, and Mini LED primer curing equipment in different process segments to further enrich the company's product line. 5) In terms of semiconductor-specific equipment, the company is actively developing new products and technologies, and has developed semiconductor-related coating equipment, such as wafer thinning pre-coating machines, wafer cutting pre-laminators, strip laminators, etc., which has been recognized by customers.

The trend of localization of display panels is gradually becoming clear, and diversified layout has opened up long-term space: in recent years, China has developed rapidly in the display panel industry and has become the world's largest panel producer. Domestic panel companies, led by BOE and Huaxing Optoelectronics, have an important position in the global market and have become the main contenders in the global panel market. According to the “Insights on the Development Status and Trends of China's New Display Industry” report released at the 2022 World Display Industry Conference, the annual production capacity of display panels in China has reached 200 million square meters, which strongly supports applications in the fields of smartphones, televisions, monitors, laptops, tablets, etc., and the scale of the industry has risen to number one in the world, becoming an important force in upgrading information consumption and expanding the digital economy. At present, the company's business has covered LCD display equipment, flexible OLED display equipment and VR\ AR\ MR display equipment, etc., and has won recognition from domestic first-tier flat panel display equipment manufacturers based on its own advantages. In the field of LCD display equipment, the company has established good cooperative relationships with many domestic panel manufacturers and has gradually achieved import substitution; in the field of flexible OLED display equipment, relying on the company's leading technology in the field of panel attachment, the company has become one of the preferred partners of domestic flexible panel manufacturers; in the field of VR/AR/MR display equipment, the company produces micro OLED (silicon OLED) wafer display polarizer attachment equipment, PF film laminating equipment, OCA laminating equipment, HTH full laminating equipment, etc. The equipment basically covers the relevant equipment required for the module assembly and post-assembly process in the VR/AR/MR process. The related products have now been approved by Hefei Shiya and other customers. In addition, in the field of Mini/Micro LED equipment, the company's subsidiary Microchip has increased its investment in R&D in the Mini LED process, developed miniLED post-soldering repair technology, post-reflow soldering repair technology, and integrated post-film compression repair technology. It has made breakthroughs in technological innovation, product optimization and market entry. In the field of semiconductor-specific equipment, the company has developed semiconductor-related laminating equipment, and the detector module microassembly line developed by the subsidiary Microchip Semiconductor, in the production process of the medical device tomography CT scanner China has played an important role as a substitute for localization, and has been recognized by customers such as Aviation and General Aviation. In the future, as OLED panel production capacity gradually shifts to domestic markets and the company continues to make breakthroughs in technological innovation in the semiconductor equipment field, the company's performance is expected to experience rapid growth.

The first coverage gave an “increase in holdings” rating: The company's main business is R&D, production and sales of special equipment for flat panel displays and semiconductor equipment. It is one of the few domestic enterprises that also has R&D and manufacturing capabilities for special flat panel display equipment and semiconductor equipment. In 2022, the company relied on its technical advantages and customer resource advantages to continuously expand its market share in the field of special equipment for flat panel displays and semiconductor equipment. Furthermore, the company's Zhongshan base plant was completed and production capacity was gradually released, and the company's product delivery capacity was further enhanced. In the future, as demand for consumer electronics picks up and the trend of localizing display panels intensifies, the company is expected to usher in new growth opportunities. The company's net profit for 2023-2025 is estimated to be 53 million yuan, 101 million yuan and 127 million yuan respectively; EPS is 0.38 yuan, 0.72 yuan, and 0.91 yuan respectively; PE is 46X, 24X, and 19X respectively.

Risk warning: Risk of delays in technology updates and iterations, risk of increased market competition, risk of loss of core technical personnel, management risk.