Incident: Recently, Changguang Huaxin invested in the establishment of a subsidiary, Gallium Ruixin Optoelectronics. The company is an achievement transformation and industrialization platform company established on the basis of the GaN Laser Joint Laboratory jointly built by Changguang Huaxin and the Suzhou Institute of Nanotechnology and Nanobionics of the Chinese Academy of Sciences. In addition, the company launched a 50W high-power semiconductor laser chip in 2023, with an optoelectronic conversion efficiency of over 62%. It has now been mass-produced and shipped.

Set up a shareholding subsidiary to accelerate domestic substitution in the gallium nitride industry. Semiconductor lasers manufactured based on GaN can cover the visible light band from ultraviolet, purple, blue light to green light, and are widely used in laser processing (metal processing, laser direct writing), laser display (laser large screen TVs, XR microprojection), laser lighting (car headlights), visible light communication, etc., with a total market size exceeding 10 billion dollars. Currently, they are mainly monopolized by overseas manufacturers such as Osram, Japan Asia, and Sharp. Gallium Ruixin has the first team engaged in gallium nitride-based laser research in China. It is expected to complete engineering samples and seed customer verification of blue light and green light chip products by the end of 2023, build the largest domestic gallium nitride laser chip mass production line in 2024, and achieve mass production and shipment of a full range of products, including violet light chips, to accelerate domestic substitution in the gallium nitride industry.

High-power chips continue to be refined, and special applications have entered the fast track of development. The company launched a 35W semiconductor laser chip product in 2022 and a 50W product in 2023. It is currently the semiconductor laser chip with the highest mass production power, and has now been mass-produced and shipped. With continuous refinement in semiconductor laser chip output power and conversion efficiency, the company has obvious technical advantages in the field of special applications in China. Coupled with its previous strategic investment in Zhongjiu Daguang, the special application business is expected to accelerate.

Multi-material system layout to build a platform-based IDM company. The company is one of the few IDM semiconductor laser companies in the world with production capacity for key processes such as 6-inch wire epitaxial and wafer manufacturing. Its products range from gallium arsenide high-power semiconductor laser chips, VCSEL lidar chips, to indium phosphide optical communication chips, to gallium nitride visible light chips, gradually constructing the three major material systems of GaAs, InP, and GaN. The prototype of platform-based IDM companies continues to open up.

Investment advice: The company's net profit for 2023-25 is estimated to be 17/28/420 million yuan, corresponding to the PE valuation of 101/61/40 times, maintaining the “buy” rating.

Risk warning events: downstream demand falls short of expectations, new product development falls short of expectations, etc., risk that information used in research reports is not updated in a timely manner.