1H23 performance is in line with market expectations

Feikai Materials announced 1H23 results: revenue of 1,318 million yuan, down 19.88% year on year; net profit of 174 million yuan, down 31.08% year on year, corresponding to profit of 0.33 yuan per share, in line with market expectations.

1H23 deducted non-net profit of 126 million yuan, a year-on-year decrease of 53.62%.

1H23 screen display materials revenue fell 13.71% year on year to 604 million yuan, gross margin fell 3.21ppt to 36.9% year on year. Among them, subsidiary Hecheng Display's revenue fell 14.9% year on year to 483 million yuan, and net profit fell 37.1% year on year to 102 million yuan. Benefiting from the development of 5G communication construction and the expansion of operating scenarios for new products, plastic coating materials, 1H23 UV curing materials increased 3.16% year on year to 334 million yuan, and gross margin increased 2.4ppt to 33.08% year on year. Affected by multiple factors such as weak demand in the integrated circuit industry and industrial inventory adjustments, 1H23 semiconductor materials revenue fell 11.2% year on year to 260 million yuan, and gross margin fell 2.32 ppt to 35.97% year on year. Due to reduced demand for specific products such as bromoacetonitrile, etc., 1H23 pharmaceutical intermediates revenue fell 72.95% year over year to 85 million yuan.

2Q23 revenue was 716 million yuan, down 8.1% year on year and up 19% month on month; net profit of Gimu was 102 million yuan, down 10.7% year on year, and up 41% month on month. 2Q23 Screen display materials revenue increased 25.4% month-on-month to 336 million yuan, and semiconductor materials revenue increased 24.2% month-on-month to 144 million yuan. The 2Q23 month-on-month increase in net profit was mainly due to a month-on-month increase of 57 million yuan in income from changes in fair value.

Development trends

As demand recovers and the localization rate increases, screen display materials are expected to continue to grow. The screen display materials industry has entered a recovery period. 2Q23, the company's screen display materials revenue increased 25.4% month-on-month. As the localization rate of liquid crystal mixing continues to increase and the expansion of business such as panel photoresists, we expect the company's screen display materials to continue to grow.

Continuously promote the layout and development of new products. In the first half of the year, the company launched a new generation of photoinitiator (TMO) products. At the same time, the company's cholesteroidal electronic paper LCD and PI-less LCD have achieved client-side verification. We expect the company's LCD will continue to expand into the non-display field in the future. Furthermore, the company's i-Line photoresist and 248nm photoresist anti-reflective layer materials have already been mass-produced by some customers.

Profit forecasting and valuation

Due to the decline in revenue and gross margin from the pharmaceutical intermediates business, we lowered our 2023/24 profit forecast by 22%/18% to 405 million yuan and 493 million yuan. Currently, the company's stock price corresponds to a price-earnings ratio of 19.4/16.0x for 2023/24. Due to lower profit forecasts and a downward shift in the industry valuation center, we lowered our target price by 28.6% to 20 yuan, in response to 34% of room for increase and 26.1/21.5x price-earnings ratio in 2023/24, maintaining our outperforming industry rating.

risks

TFT LCD sales fell short of expectations, and demand for semiconductor materials and UV curing materials fell short of expectations.