Ping An's point of view:

Core electroplating cleaning technology was upgraded, and the paint business was expanded through outsourcing. The company was founded in 1999, starting with electronic chemicals and supporting equipment for semiconductors. It developed its own first-generation electronic electroplating and cleaning technology in the first ten years, and achieved major breakthroughs in semiconductor packaging leadfoot technology; ten years after establishment, it broke through second-generation electroplating and cleaning technology to fill the gaps in copper interconnection process materials for chip manufacturing. It is currently the only domestic enterprise that can meet the requirements of all technology nodes in the 90-14 nm copper chip process for electroplating cleaning products. At the same time, it also develops semiconductor materials such as etching solution, grinding liquid, and photoresist. Furthermore, in 2013, the company entered the field of fluorocarbon coatings through the acquisition of Jiangsu Kaopule, and paint became one of the company's main businesses.

Focus on semiconductor electronic chemicals, and new production capacity is yet to be released. The company is promoting the independent listing of the subsidiary Jiangsu Kaopule (which operates the paint business) on the new third board, and the headquarters will concentrate resources to lay out semiconductor materials.

The company currently has three production bases: Shanghai headquarters, Hefei Second Plant, and Shanghai Chemical Industrial Zone. The electronic chemicals production capacity at the Shanghai headquarters base in 2022 will reach 19,000 tons/year; Hefei Second Production Base Phase I (including 500 tons of photoresist) is expected to be put into operation in 23Q4, with a total investment of 335 million yuan, and a production capacity of 530,000 tons/year for phase II is expected to be put into operation by 24H2; Shanghai Chemical Industry Zone plans to build 30,000 tons/year of electronic chemicals and 500 tons/year of photoresist, which is expected to be completed by the end of 2025, the end of June 2026 Pre-production. The scale of the company's electronic chemicals continues to grow strongly. After the production capacity of the three bases is released, the core business will further focus on semiconductor materials.

Mass production of high-resolution photoresists is imminent, and orders for some products have been placed one after another. The company plans a total production capacity of 1,513 tons of dry/wet semiconductor photoresist for line I, KrF, and ArF, including 513 tons for the Shanghai headquarters, 500 tons for the Hefei base, and 500 tons for the Shanghai Chemical Industrial Park. At the same time, it plans to have 10,000 tons of photoresist diluents. The company currently has more than 10 models of ArF dry method, ArF immersion, KrF, I line products, etc., and 30 tests are in progress. Among them, I-line and KrF photoresist have provided samples for testing and verification from over 10 clients, and some products have received continuous orders from wafer manufacturers in small batches; Kr F thick film photoresist achieved stable mass production in 2022 as scheduled; ArF dry photoresist began small-batch sales in 2022 and is currently in the customer certification stage. Stable mass production is expected to begin in 2023; R&D of ArF immersion photoresist is progressing smoothly. The installation and commissioning of the ASML-1900 lithography machine has basically been completed.

Industry prospects: Terminal fundamentals are expected to be repaired, and there is broad space for domestically produced semiconductor materials. According to WSTS's latest forecast data, the global semiconductor market will drop 10.3% in 2023 and increase 11.8% year-on-year in 2024. In the second half of this year, semiconductor companies will still focus on inventory removal. It is expected that in 2024, overall fundamentals will improve due to inventory removal, improved supply patterns, and a recovery in demand, and an upward trend in corporate performance. At the same time, at present, domestic chips are still highly dependent on imports, global wafer production capacity is gradually shifting domestically, and the domestic semiconductor materials market space is vast. In the future, with the gradual restoration of the fundamentals of the terminal semiconductor industry, the continuous expansion of domestic large-size wafer production capacity, and the widespread application of advanced packaging technology, the demand for wet electronic chemicals, photoresist, and electroplating packaging materials for integrated circuits in China will also continue to increase.

Profit forecasts and investment ratings. A new electronic chemical project is about to be put into operation. Functional wet electronic chemicals, photoresist and supporting trial production capacity will be released and production will gradually increase. Combined with the gradual improvement in fundamentals of the downstream semiconductor and display panel industries, demand will rise. It is expected that the company's performance will continue to grow. It is estimated that in 2023-2025, it will achieve revenue of 1,345, 18.49, and 2,486 billion yuan, respectively, with net profit of 157, 205 million yuan, and 288 million yuan. Corresponding to PE73.5, 56.2, and 39.9 times the closing price on September 4, 2023, the first coverage was given a “recommended” rating.

Risk warning: 1. The growth rate of terminal demand fell short of expectations. If the restoration of fundamentals in terminal industries such as semiconductors falls short of expectations and demand is difficult to recover, then the growth rate of the company's electronic chemicals business may be limited. 2. The risk of increased market competition and a sharp decline in product prices. If comparable companies achieve technological breakthroughs and greatly increase the scale of production capacity, there may be a risk of overcapacity for some products and increased market competition, which in turn will lead to a decline in the prices of related products and a sharp reduction in gross profit. 3. The risk of large fluctuations in raw material prices.

If basic chemical raw materials are affected by extreme climate, overseas geopolitics, etc., manufacturers are prevented from starting construction, supply and demand fundamentals and inventory structures change greatly, then raw material prices may fluctuate greatly, thereby causing the company's production costs to rise sharply.