Event: the company releases its 2023 half-yearly report. 2023H1 realized operating income of 1.342 billion yuan, down 14.22% from the same period last year; realized net profit of 174 million yuan, down 65.49% from the same period last year; realized net profit of 50 million yuan, down 89.00% from the same period last year; and net cash flow from operating activities was 369 million yuan, down 48.84% from the same period last year. 2023Q2 realized operating income of 710 million yuan, down 12.17% from the same period last year, up 12.30% from the previous year; realized net profit of 139 million yuan, down 47.51% from the same period last year, and increased by 304.25%; and realized net profit of 27 million yuan after deducting non-return, down 88.00% from the same period last year and 12.95% from the previous year.

Comments: 23Q2 revenue and profits have achieved month-on-month growth, the company's industrial chain upstream and downstream integrated layout, superior silicon wafer, power devices and compound semiconductor business, continuous optimization of product structure. The semiconductor wafer / semiconductor power device / compound semiconductor RF chip business of 23H1 achieved operating income of RMB 555 million, respectively, compared with the same period last year. It was-18.48%, 10.69%, 95.25% and 16.74%, 44.34%, 10.21%, respectively, compared with the same period last year. The gross profit margin of sales was 27.27%, compared with the same period last year-20.26pct. 1) the decline in 23H1 revenue is mainly due to the weak prosperity of the industry, the obvious decline in market demand, the reduction of sales orders for some products and the reduction in the prices of some products. 2) the decline in 23H1 net profit is mainly due to: the company decided to increase its equity investment project in 2021 to gradually switch to production since June 2022, and the Jiaxing Jin Ruihong acquired in March 2022 successively converted its plant and equipment to production since April 2022, and the corresponding fixed costs such as depreciation expenses increased significantly; the company issued 3.39 billion face value convertible bonds in November 2022, and withdrew 62.36 million yuan of financial expenses for the period in accordance with the requirements of accounting standards. The year-on-year decline in 23Q2 revenue and net profit is mainly due to the weak prosperity of the industry and the decline in sales orders as a result of shrinking market demand.

The contribution of silicon wafer business is stable, and the heavy and light doping technology of 12-inch silicon wafer flies together. With the rapid development of clean energy, new energy transportation, especially new energy vehicles, the construction of industry and the Internet of things and 5G has led to an increase in the demand for some semiconductor chip basic materials. At the company level, wafer products range from 6 inches to 12 inches, from light doping to heavy doping, and from N-type to P-type. 12-inch semiconductor wafer technology capabilities have covered more than 14nm technology node logic circuits and memory circuits. In the first half of 2023, the company's semiconductor wafer revenue reached 755 million yuan, down 18.48% from the same period last year. Some of the company's fund-raising projects have been switched to production since June 2022, and the corresponding fixed costs such as depreciation expenses have increased a lot, but since the second half of 2022, due to the decline in demand in the consumer electronics market, the capacity utilization of silicon polishing wafers has declined, and the prices of some silicon wafer products have been reduced. Due to the weak economy, the 12-inch silicon wafer in Quzhou is still in the process of climbing capacity, and Jiaxing Jinruihong was acquired in March 2022. 2023H1, benefiting from the stable demand for power semiconductors, the company has sufficient capacity utilization of silicon epitaxial wafers.

Photovoltaic + car gauge core layout, full of power devices business orders, IGBT completed small batch shipments. The rapid development of photovoltaic and new energy vehicle industry has led to an increase in the demand for power semiconductor devices. According to YOLE,2021 annual power semiconductor device market applications, transportation and energy are US $6.3 billion and US $1.7 billion respectively, and the market size is expected to reach US $13.5 billion and US $2.8 billion respectively in 2027, with CAGR reaching the highest 13.5% and the second highest 8.8%, respectively.

2023H1, thanks to the relatively stable demand for clean energy and new energy vehicles, the company's semiconductor power device chip sales orders are full, capacity utilization remains high, production and sales are strong, and sales volume is down 3% compared with the same period last year, but the gross profit margin has dropped due to the reduction in sales prices of some products. The company gives full play to the advantages of the integration of its industrial chain, fully meets the diversified needs of customers with continuous technological innovation and solid technical cooperation, in the face of increasingly fierce market competition, further enriches the product range, optimizes product structure, expands high-quality customers, around the two major product categories of photovoltaic and vehicle regulations, gives priority to expanding the sales scale and proportion of groove products, and steadily increases the production and marketing proportion of FRD products. Speed up the development of IGBT and other products, IGBT products successfully completed technical development, through the verification of some customers, began to enter the stage of small batch shipment.

Compound semiconductor RF chip technology has outstanding advantages, cost control is effective, and negative gross profit margin narrowed compared with the same period last year. New technologies and products such as 5G communications, 3D recognition, artificial intelligence, self-driving and high-end flat panel display also bring more room for the development of gallium arsenide RF chips. According to Qorvo, the global market for 5G RF front-ends will grow from zero in 2018 to $5.5 billion in 2022. Through the previous technology accumulation and customer certification, the company's compound semiconductor RF chip business has realized the application of InGap HBT technology in 5G mobile terminal and WiFi wireless network, developed the global advanced double 0.15micron GaAs pHEMT process technology, 3D laser (VCSEL) filled a number of domestic technology gaps, passed the IATF16949 vehicle specification quality system certification, and realized batch shipment. Benefiting from the breakthrough in product technology, the progress of RF chip verification has basically covered domestic mainstream mobile phone chip design customers, with a substantial increase in on-hand orders compared with the same period last year, a substantial increase in revenue in the first half of the year, a narrowing of negative gross profit margin and a reduction in losses.

The Dingzeng project is progressing smoothly and the convertible bond issue was completed at the end of 22. In November 2022, the company publicly issued convertible corporate bonds to raise 3.39 billion yuan, which is mainly used in the annual production of 1.8 million 12-inch semiconductor silicon epitaxial wafers and 6 million 6-inch silicon polishing wafers for integrated circuits. The investment progress of the 2023H1 project reached 10.99% and 31.91% respectively. The company's fixed growth project in 2021 is progressing smoothly. The annual production of 1.8 million 12-inch silicon wafers for integrated circuits, the annual production of 720,000 6-inch power semiconductor chips and 2.4 million 6-inch silicon epitaxial wafers reached 96.43% 100.74% and 98.10% respectively.

Investment advice: affected by the international situation and macroeconomic environment and other factors, the prosperity of the semiconductor industry has declined, and the market demand is weak. We downgrade our profit forecast. It is estimated that the company's parent net profit in 2025 will be reduced from $7.04 billion to $665 million, maintaining the company's "buy" rating.

Risk hints: lower-than-expected sales of downstream products, lower-than-expected production capacity construction, fluctuations in raw material prices