Incidents:

The company released the 2023 semi-annual performance report. In the first half of the year, the company achieved operating income of 601 million yuan, up 13.57% year on year; net profit of 51 million yuan, up 65.19% year on year; net profit after deducting non-net profit of 46 million yuan, up 56.31% year on year; and basic earnings per share of 0.08 yuan/share. Performance was in line with expectations.

The electric vacuum & military products business grew steadily, and profitability increased steadily in the first half of the year. The company continued to accelerate in-depth breakthroughs and collaborative development in key areas of the three business segments. The electric vacuum business achieved revenue of 321 million yuan, an increase of 14.32% over the previous year. The growth rate was significantly higher than the investment level for power grid engineering construction (7.8% year-on-year growth rate). The performance of the military goods business grew steadily. Revenue contributions mainly came from two entities, Eagle Machinery and Xi'an Ruikong. In the first half of the year, Eagle Machinery achieved revenue of 95 million yuan, an increase of 14.34% over the previous year; Xi'an Rui Control achieved revenue of 51 million yuan, an increase of 29.74% over the previous year.

Chengdu Xuci's main business is ceramic materials. In the first half of the year, it achieved revenue of 1.56 million yuan, an increase of 8.81% over the previous year, net profit of 326,400 yuan, and a year-on-year increase of 1,513,300 yuan. Profitability increased steadily. 23H1's gross profit margin and net profit margin were 9.82% and 7.65% respectively, up 1.52 pct and 2.09 pct over the previous year. The main reasons were product structure optimization and cost reduction efficiency improvements.

Large-scale stable mass production of aluminum nitride powder, application expansion and acceleration of the industrialization of aluminum nitride is the company's “number one project”. In the first half of the year, the first continuous aluminum nitride powder furnace in China was successfully put into operation and large-scale stable mass production, and the company's aluminum nitride industry showed a strong development trend.

In terms of aluminum nitride, the company's annual production capacity of aluminum nitride powder has reached 240 tons, with a product yield of more than 85%; in terms of aluminum nitride substrates, it has completed process debugging and commissioning of 7 casting production lines. Currently, it has achieved an annual production capacity of 3 million pieces and a product yield of more than 80%; in terms of aluminum nitride HTCC, the company expects to achieve batch shipment by the end of the year. Currently, the company's products have entered the core industrial chain of semiconductor equipment; in terms of aluminum nitride structural parts, the company is also accelerating the domestication of electrostatic chucks and heating plates for semiconductors. The company is accelerating key technical research in the above fields and responding to market demand with high-quality products. The aluminum nitride business is expected to grow rapidly in the future.

Profit Forecasts, Valuations, and Ratings

We expect the company's operating income in 2023-2025 to be 14.59/20.07/2,567 billion yuan, with a year-on-year growth rate of 27.84%/37.55%/27.90%, respectively; net profit of 146/259/357 million yuan, a year-on-year growth rate of 45.66%/77.71%/37.79%, EPS of 0.18/0.31/0.43 yuan/share, and a 3-year CAGR of 52.79%. Given that the company is about to break through in the industrialization of aluminum nitride, with reference to comparable company valuations, we gave the company 30 times PE in 2024, a target price of 9.34 yuan, and maintained a “buy” rating.

Risk warning: Risks such as the expansion of aluminum nitride powder production and the industrialization of aluminum nitride ceramic substrates falling short of expectations.