We believe the core focus of Hongwei Technology is the product structure upgrade and the deep binding of core customers: the company is currently one of the few domestic companies that use modules as the main source of revenue, and the future expansion of production capacity is all module products, so the share of module revenue is expected to increase further in the future. At the same time, in core areas, the company is deeply tied to high-quality customers such as A customers and BYD. Currently, the company's revenue side is showing a quarterly upward trend. With the gradual release of module production capacity and strong demand from high-quality customers, it is expected that the scale will increase rapidly in the future.

Performance entered an acceleration channel, and revenue continued to rise for 5 consecutive quarters. 2023Q2 achieved revenue of 433 million dollars in a single quarter, an increase of 124.72% over the previous year, and an increase of about 30.83% over the previous year. We believe that as of 2023Q2, the company has achieved a sequential increase in revenue for the 5th consecutive quarter. On the one hand, it shows that the company's order situation continues to be full, and at the same time confirms the continued strong demand in the new application fields that the company is currently developing. We believe that in the future, the company will rely on high-quality customers in core areas, combined with the rapid expansion of its own production capacity, and is expected to continue the current trend of accelerated performance.

Production capacity is being actively expanded, and a high increase in performance is guaranteed. In 2022, the board of directors of the company passed a bill to build an automotive-grade power semiconductor discrete device project, and agreed to invest 600 million yuan to build the project. It is planned to take 3 years to complete. At that time, the company will have a production capacity of 8.4 million units/year for automotive-grade power semiconductor discrete devices; in 2023, the company will issue 4.3 million convertible bonds, totaling 430 million yuan. The construction cycle is 3 years. After the project is completed, it will form a production capacity of 2.4 million blocks/year for automotive-grade power semiconductor devices. The company's future production capacity will all come from modules. According to the company's announcement, according to the current plan, after the Hsinchu Plant's Phase II production capacity is released in 2025, the company will have a total module production capacity of 19.5 million units/year at that time.

Large orders are supported, and high-quality customers have been accumulated in core areas. After years of accumulation, the company has accumulated a large number of high-quality customers in the fields of industrial control, photovoltaics, electric vehicles, charging stations, etc., such as industrial control: Delta Group, Huichuan Technology, etc.; in the photovoltaic field: A customer, Sunshine Power, Goodway, etc.; in the field of electric vehicles: BYD, Huichuan, Zhenqu Technology, etc.; in the field of charging piles: Infineon, Incore, etc. On the evening of August 21, 2023, the company issued an announcement disclosing the signing of a major contract. According to the company announcement, from September 2023 to June 2026, Hongwei Technology will provide customer A with no more than 200,000 module products per month. The specific supply volume will be adjusted dynamically on an annual basis based on actual production capacity in September 2023, July 2024, and July 2025.

Power electronics: The IGBT boom is still the same, and modules are the core focus. Looking at the industry from a short-term perspective, according to 2023Q2 data released by Future Electronics in June 2023, the world's top five power electronics brands (ST, Infineon, MGM, Aces, and Fairchild Semiconductor) currently have the longest IGBT product delivery cycle of 54 weeks, which is the same as the previous period, and performance is still tight. From the perspective of long-term development of the industry, compared to single-tube discrete devices, module products have higher reliability, integration and efficiency in high-current and high-voltage scenarios, and are expected to achieve rapid growth higher than the industry's compound growth rate in the future: According to Yole, the global power module market is expected to reach 9.749 billion US dollars by 2026, and the compound growth rate from 2020 to 2026 is 11.0%.

From the perspective of industry growth, we believe that the high price of SiC and the relatively low production capacity of SiC in the short term will limit the rapid increase in SiC penetration rate in electric vehicles to a certain extent. In the future, comprehensive solutions for mixing multi-power devices may become mainstream: for example, mixing SiC MOSFETs and Si IGBTs, where IGBTs are gradually converted to vehicle grade 12 inch to reduce costs, while at the same time gradually penetrating relatively mature gallium nitride (GaN) applications in automotive low-power scenarios.

Profit forecast: We expect Hongwei Technology to achieve revenue of 17.78/28.00/4.5 billion dollars in 2023E/2024E/2025E, respectively; net profit of 1.51/2.90/560 million; corresponding to the current stock price PS valuation is 4.7/3.0/1.9x, and the average industry valuation is 7.0/5.4/4.4x. Compared with the industry average, it has a PS valuation advantage and has been upgraded to a “highly recommended” rating.

Risk warning: Downstream demand falls short of expectations, capacity expansion falls short of expectations, and market competition increases risk.