2Q23 performance meets our expectations

The company announced 1H23 results: revenue of 2,706 million yuan, down 2.06% year on year; net profit of net income of 74.06 million yuan, down 48.56% year on year; net profit of 18 million yuan after deducting non-current profit (non-current profit and loss is mainly 47.91 million yuan in government subsidies). Corresponding to 2Q23 revenue of 1,468 billion yuan, up 11.63% year-on-year/18.50% month-on-month; net profit of 44.59 million yuan, down 39.09% year-on-year/51.29% month-on-month increase; after deducting non-net profit of 36.23 million yuan; after deducting non-net profit of 36.23 million yuan, we judge that the company's 2Q23 revenue increase and net profit decline was mainly due to the rise in raw material prices in the materials sector. The company's 1H23 performance was in line with our expectations.

Development trends

Downstream demand for consumer electronics is sluggish, and profits in the new display sector are under pressure. 1H23's new display sector revenue was 2,306 million yuan, bucking the trend and increasing 8.85% year on year. We determined that the main reason was that the company actively adjusted product lines and technology development paths; net profit - 44.69 million yuan (-364.4 billion yuan in the same period last year), net interest rate fell 0.2ppt to -1.9% year on year, mainly due to weak consumer display market demand. 1H23 gross margin fell 0.2ppt to 7.9% year on year.

The short-term performance of the applied materials sector is under pressure, and attention is being paid to the progress of synthetic quartz sand. 1H23 The applied materials sector had revenue of 870 million yuan, down 5.44% year on year; gross margin fell 7.1 ppt to 21.0% year on year, mainly due to the fall in market prices of fused zirconium series products from a high level and the rise in raw material prices in the applied materials sector; net profit of 159 million yuan. The company said that it is currently actively developing application fields such as vanadium-zirconium blue ceramic pigments, foam ceramic filters for zirconia, and automobile brake pads, optimizing and upgrading fluorination and grinding preparation processes to cultivate new economic growth points. In addition, 1H23 completed the acquisition of 100% shares in Taihu Quartz and 70% of Kaisheng Substrates. Among them, Taihu Quartz's high-purity quartz sand project with an annual output of 5,000 tons is progressing in an orderly manner.

The UTG+ synthetic silica project is progressing steadily, and we are optimistic about the long-term release space. In terms of new displays, the laptop touch display module project with an annual output of 13.5 million pieces already has mass production capacity. The installation of 2 in-vehicle and 4 laptop line production lines has been completed, and it has already entered the supporting supply chains of some mainstream domestic car companies; UTG has completed the import of some panel manufacturers. In terms of applied materials, the company announced that the semiconductor silicon dioxide project with an annual output of 5,000 tons is progressing in an orderly manner. High-purity ultra-fine spherical silica samples and polishing solutions for semiconductor packaging have been verified by domestic and foreign customers, forming small-batch sales. We are optimistic about the incremental space brought about by the company's future UTG and synthetic silica projects gradually being introduced into mass production.

Profit forecasting and valuation

We are keeping our 2023/2024 profit forecast unchanged. The current stock price corresponds to 43.2 times P/E in 2024. Maintaining an outperforming industry rating and a target price of 14.7 yuan (based on the SOTP model), corresponding to 59.9 times P/E in 2024, there is room for an increase of 38.4% from the current stock price.

risks

The production progress of high-purity synthetic silica fell short of expectations, and the introduction of UTG customers fell short of expectations.