Since Tokyo Electron (TEL) certified its high-temperature quartz materials for semiconductor manufacturing in 2019, Pacific Quartz has gradually become the original equipment manufacturing (OEM) service provider of leading semiconductor manufacturers both at home and abroad. In 1H23, despite sluggish industry demand, the Company's semiconductor business revenue still increased by 90% YoY, indicating that its semiconductor products are gradually entering the stage of large-scale downstream procurement and a ramp-up in shipments. We expect the Company's semiconductor business to maintain a CAGR of over 50% in the next two years. Coupled with the expectations of photovoltaic-grade (PV-grade) high-purity quartz sand prices remaining elevated in 2024, we believe that the Company's market cap would be revalued. We reiterate the "BUY" rating along with our target price of Rmb155.
High-purity quartz is a key auxiliary material for semiconductors, with a market size of Rmb24bn in 2022.
In semiconductor integrated circuits (ICs), quartz products have excellent properties such as high temperature resistance, corrosion resistance, and low expansion, making them a key material that is unlikely to be replaced. They also have consumable properties and play a key role in load-bearing, isolation, and other aspects that are related to most processes in semiconductor wafer manufacturing, and thus have a far-reaching impact. According to Pacific Quartz's annul results and Kaide Quartz's prospectus, the production of every US$100mn of electronic information products consumes an average of US$600k of high-end quartz materials. Therefore, we estimate the global semiconductor quartz product market size at around Rmb24bn in 2022.
There are high entry barriers for all links in the quartz industry.
Once the impurities and stability of quartz materials affect chip production, the costs of making mistakes are high. Therefore, semiconductor quartz materials have high requirements for all the upstream, midstream, and downstream links. In terms of upstream quartz sands, Spruce Pine, a quartz mining district in the Appalachian Mountains, basically dominates the high-end semi high-purity sand market due to its exceptional mineral resource endowment. In terms of midstream production processes, various technologies such as electric melting, gas melting, and synthesis all have their pros and cons, and different application links call for the accumulation of varied process technologies. The certification requirements for downstream links are stringent, and the certification cycle could last for 3-5 years. Only after obtaining certification can one enter the supply chain procurement catalog.
Greater opportunities for import substitution at the semi cycle bottom with increased high-end demand.
The current semiconductor cycle has been declining since 2Q22. According to the historical cycle pattern, the industry cycle may bottom in as early as 2H23, and a turning point may gradually emerge. The more advanced the semiconductor manufacturing process, the higher the requirement for the stability of semi quartz materials in special environments such as high of controlling the processing accuracy of large-sized quartz materials has also increased. Overall, the demand for high-end semi quartz products continues to rise. Currently, due to the early start and advanced technologies of foreign manufacturers, high-end semi quartz is mainly dominated by foreign capital. The share of domestic semi quartz enterprises is estimated at only about 10%, and the potential for import substitution is enormous. With enterprises such as Pacific Quartz, Feilihua Quartz, and Kaide quartz gradually acquire the certification from manufacturers both at home and abroad, domestic players have been striving to catch up.
Pacific Quartz: Business enters a shipment ramp-up stage, with high visibility of middle- and long-term growth.
Pacific Quartz has mastered the technologies of electric melting, gas melting, and continuous melting. In 2019, TEL certified its high-temperature diffusion, allowing it to become the third in the world, as well as the one and only enterprise in China, that has acquired the semiconductor high-temperature certification. In addition, it has been gradually certified by leading manufacturers both at home and abroad. Despite the continuous sluggish demand for semiconductors in 1H23, Pacific Quartz still managed to post a YoY spike of 90% in operating revenue, indicating that the Company's semi products are gradually entering from the stage of small-batch procurement to large-scale procurement and a ramp-up in shipments. Its 6kt electronic-grade quartz project is likely to reach full production by 2023, potentially driving the Company's semiconductor business to achieve revenue of nearly Rmb2bn in 2025, with a CAGR of more than 50%. In addition, Pacific Quartz has accumulated rich technical experience in the purification of high-purity sands. Its production of semi sands has already started the certification process. Once the Company obtains the certification, it could effectively solve another stranglehold problem in China's semi industry and reduce the Company's raw material cost pressures, thereby enhancing its product competitiveness.
Potential risks:
Lower-than-expected PV demand; the progress of the commissioning of the Company's new production capacity not up to expectations; intensified competition on the industry supply side; the expansion of the semi business failing expectations.
Investment recommendation:
With the continuous and rapid growth of Pacific Quartz's semiconductor business and the expected high prices of PV-grade high-purity sands in 2024, we believe that the Company may embrace a potential valuation rerating. We maintain 2022E-24E EPS forecasts of Rmb15.45/28.36/35.97. By combining the comps valuation method with the Company's historical PE multiples, we assign 10x 2023E PE to maintain the target price of Rmb155 and reiterate the "BUY" rating.