Starting from the rail transit signal system, Zhonghe Technology has currently developed a "intelligent transportation" + "pan-semiconductor" business pattern. In the intelligent transportation sector, the company mainly focuses on rail transit signal systems, automatic ticket sales and inspection systems, and so on. In 2022, the rail transit sector received orders of 2.54 billion yuan, an increase of 47.2% over the same period last year. Pan-semiconductor plate, the company now has 3 to 8-inch grinding wafer, polishing wafer production capacity, and continue to increase production efforts, to the direction of large-size silicon wafer research and development. Relying on the experience in the field of rail transit and semiconductors, the company continues to expand its capacity in the field of digital intelligence to empower transportation, energy, urban governance and other scenarios. We believe that under the background of the rapid development of the digital economy, the company is expected to get development opportunities in rail transit, pan-semiconductor and other fields. we expect the company's net profit of 2023 and 2024 to be 0.59 and 1.36 billion yuan in 2025, with reference to the comparable company's target price of 9.0 yuan in 2024, covering for the first time and giving "overweight" rating.

The leader of rail transit signal system is the diversified development of "one body and two wings". Zhonghe Technology, formerly known as the Zhejiang University Semiconductor Factory established in 1970, later focused on providing global intelligent rail transit solutions with independent signal systems as the core. and adopt the "industry digital intelligence empowerment" and "intelligent transportation + pan-semiconductor" closely combined "integrated two-wing" strategic layout, focus on the development of high-tech, neck-choking strategic industry. The company's revenue structure has gradually improved, and the proportion of the main business has become increasingly prominent. In 2022, the company's revenue was 2.56 billion yuan, of which the revenue of intelligent transportation, pan-semiconductor and digital intelligence business was 1.88 trillion yuan respectively. With the gradual weakening of the impact of the epidemic, the company's profitability is expected to stabilize.

Intelligent transport business: urban rail transit development space is clear, intelligent upgrading ushered in new opportunities. Signal system is one of the core control links in the field of rail transit, which is mainly composed of automatic train control system (ATC) and depot signal system. According to the Development Plan of Modern Integrated Transportation system issued by the State Council, China plans to achieve 10,000 km of urban rail transit by 2025, an increase of 3400 km compared with 2020, bringing a clear incremental market space. With the technological upgrading and the increasing demand for passenger transport efficiency, the industry has also produced upgrading requirements for the rail transit signal system. The life cycle of the rail transit signal control system is about 10 years, giving birth to a market for renewal and upgrading. We believe that incremental opportunities + stock transformation is expected to bring development opportunities for the company's future performance. According to RT rail transit data, the market share of Zhonghe Technology urban rail transit signalling system reached 14% in 2021, making it one of the most important players in the market.

Pan-semiconductor business: one of the core materials of semiconductors, multi-application-driven wafer market growth. Silicon wafer is the cornerstone of the semiconductor industry. According to SEMI data, silicon wafer accounts for 33% of the wafer manufacturing material subdivision in 2021, which is the largest semiconductor material. China has a broad downstream market and multi-scene catalytic market development. according to the Forecast of the Industrial Research Institute, China's semiconductor wafer market will reach 30 billion yuan in 2026 and CAGR will reach 13.3% from 2021 to 2026. In addition, with the increasing demand of wafer factories to reduce costs and increase efficiency, wafers are developing in the direction of large sizes. according to data from the China Business Industrial Research Institute, in 2021, the global shipments of 12-inch and 8-inch wafers accounted for 68.5% and 24.6%, respectively. Large-size silicon wafers have high requirements for production technology and technological process. At present, overseas companies mainly occupy most of the market share. According to Omdia data, five overseas companies, such as Xinyue Chemical and SUMCO, occupy 94% of the global silicon wafer market in 2021, and there is significant room for domestic substitution.

Technology self-research to promote domestic substitution, "1-2-N" numerical intelligence strategy has been steadily implemented. The company attaches importance to R & D investment to promote the development of core technology. At present, the company has 450 independent intellectual property rights and has mastered the core technology of rail transit system and semiconductor wafer production. In terms of intelligent transportation, the company continues to add new orders, reaching 2.54 billion yuan in 2022, an increase of 47.2% over the same period last year. Sufficient orders on hand are expected to lay the foundation for the company's future performance development. In the field of pan-semiconductors, the company's endogenous epitaxial layout of materials, equipment, optoelectronic devices, integrated circuits and other links. Among them, the core area of silicon wafer expansion is imminent: according to the 2022 annual report, the company expects to increase the production capacity of 6-inch single crystal polishing wafers by 196 million pieces per year; according to the company announcement, on June 8, 2023, the company signed an investment agreement. Its sub-project 1 plans to build an annual production line of 2.6 million semiconductor polishing wafers for 4-6-inch high-end power devices. We believe that the company is expected to achieve actual performance increment by relying on its own technological advantages and industry Know-how under the background of the rapid development of digital economy.

Risk factors: the risk that the investment in urban rail transit is lower than expected; the risk that the industry competition will lead to a decline in gross profit margin; the risk that the progress of technological research and development is not as expected; the risk that the progress of project construction is not as expected; the risk of bad debts of accounts receivable; the risk of rising prices of raw materials upstream of semiconductors; the risk that shipments of semiconductor power devices fall short of expectations, etc.

Earnings Forecast, valuation and rating: we expect the company's 2023 EPS 2024 to be 0.31 yuan in 2025 and the current share price to correspond to 35 times PE in 2024. Considering the company's rail transit signal system business order delivery cycle, it is expected that the relevant performance will be reflected in the follow-up, we take 2024 as the valuation benchmark. Considering the business situation of the company, we use the segment valuation method. The intelligent transportation industry chooses China General number, Traffic Control Technology and thinking Train Control as comparable companies, of which China General number adopts the forecast of CITIC Research Department, and the rest of the company has the same expectation of wind. The average PE of comparable company in 2024 is 12 times, considering the technical advantages of Zhonghe Technology in the field of urban rail transit and the growth of new orders. We give the company intelligent transportation business 14 times PE, corresponding to a market capitalization of 1.29 billion yuan. For pan-semiconductor manufacturing, we choose Lion Micro and Shanghai Silicon Industry as comparable companies, in which Shanghai Silicon Industry adopts CITIC Research Department Forecast, Lion Micro adopts wind consensus expectation, considering the future growth of semiconductor industry, we use PS valuation method to calculate that the current price of comparable company corresponds to 8 times the average PS multiple in 2024, we give Zhonghe Technology Pan-Semiconductor Manufacturing 8 times PS, corresponding to the market capitalization of 3.27 billion yuan. For digital intelligence business, we choose Jiadu Technology and Radio and Television Express as comparable companies, both of which are predicted by CITIC Research Department. The current price of comparable companies is 25 times the average PE in 2024. We give Zhonghe Technology Digital Intelligence business 25 times PE, corresponding to a market capitalization of 340 million yuan. The total value of the segment valuation method is 4.9 billion yuan, and the corresponding target price is 9.0 yuan. At the same time, we use the PEG valuation method to assist the calculation. We select China General number, Traffic Control Technology, and Lion Micro, whose main business is rail transit control system, and Lion Micro, whose main business is semiconductor silicon wafer, as comparable companies, in which China General number is predicted by CITIC Research Department, and other companies have consistent expectations for wind. The current price of comparable companies corresponds to an average PEG multiple of 1.0 times in 2024. Considering the factors such as the revenue scale and small business volume of Zhonghe Technology, we give Zhonghe Technology 0.6 times PEG in 2024, corresponding to the target price of 10.0 yuan. Considering the market capitalization volume, performance growth and profit level forecast of Zhonghe Technology, we give priority to the segment valuation method and give the target price 9.0 yuan. Coverage for the first time, giving a "overweight" rating.