1H23 Performance fell short of our and market expectations

The company announced 1H23 results: revenue of 1,083 million yuan, down 6.24% year on year; net profit of 268 million yuan, down 12.62% year on year, below our and market's agreed expectations, mainly because downstream customers are still in the inventory removal stage, and the recovery of the company's capacity utilization rate fell short of expectations. As far as the company's 2Q23 quarterly performance is concerned, it continued to improve month-on-month, with operating income of 570 million yuan, up 10.91% from the previous month; net profit of 178 million yuan, up 100.24% from the previous month.

Development trends

IDM's specialty business performed strongly. 1H23 achieved revenue of 679 million yuan, an increase of 16.11% over the previous year. Special integrated circuits and devices are an important part of the company's IDM business. The company has been deeply involved in this field for decades, has established in-depth cooperation with downstream customers, and has a first-mover advantage. The development of the special integrated circuit market is relatively steady and cyclical fluctuations are relatively smooth. We believe that business revenue in this sector is expected to continue to rise steadily.

The OEM sector experienced a serious decline. 1H23 achieved revenue of 367 million yuan, a year-on-year decrease of 32.5%. The company's OEM business mainly focuses on planar and groove power devices, including process platforms such as MOSFET, IGBT, CMOS, BCD, and MEMS. The main customer group is aimed at the consumer sector.

As the consumer market continues to be sluggish and currently lacks strong momentum for demand recovery, we believe that although the company's revenue has improved month-on-month in a single quarter, 2H23 is still under great pressure.

Production line situation update: The company currently has an 8-inch wafer production line and a 6-inch wafer production line. The 12-inch wafer production line under construction was completed in April 2023; various 6-inch SiC-SBD products have been provided to customers and are being delivered in small batches. For the 12-inch production line, the first phase was trial production in April 2023. According to the company's prospectus, the product will be put into production in July 2024; the second phase will be trial production in April 2024, and the project will be put into production in July 2025.

Profit forecasting and valuation

Given the continued weakness of the downstream consumer market, insufficient momentum for 2H23 demand recovery, and continued pressure on the company in the foundry business sector. We lowered 2023/2024 revenue by 14%/18% to 22.23/2,766 billion yuan, and net profit for 2023/2024 by 9%/8% to 4.06/466 billion yuan. We maintain the company's outperforming industry rating, but due to the company's insufficient capacity utilization rate and declining profitability, we lowered our target price by 34% to 21 yuan. The target price corresponds to 1.7/1.65x P/B 2023/2024, and the current stock price corresponds to 1.5/1.4x P/B in 2023/2024, which is 16% upward from the current stock price.

risks

Production capacity is insufficient; process iteration falls short of expectations; industry sentiment fluctuates; production line construction progress falls short of expectations.