Incidents:

The company released its three-quarter report. In the first three quarters of 2023, the company achieved operating income of 10.156 billion yuan, a year-on-year increase of 1.43% over the same period last year. In the first three quarters of 2023, the company achieved net profit attributable to shareholders of listed companies of 173 million yuan, a year-on-year decrease of 82.51%.

In the third quarter of 2023, the company achieved operating income of 3.686 billion yuan, a year-on-year increase of 13.43% over the same period last year. In the third quarter of 2023, the company achieved net profit attributable to shareholders of listed companies of 0.03 billion yuan, a year-on-year decrease of 95.19%.

Comment:

LED business prices and profits have declined sharply. Demand in the LED industry has been weak since this year. Market competition has intensified due to the removal of inventory in the industry. The company's LED chip sales price has declined year-on-year, and profit margins have been squeezed, resulting in a marked decline in the company's LED business revenue and profit.

The company continues to lay out automotive-grade SiC business to provide the company with long-term growth potential. According to the company's 2023 semi-annual report, the joint venture between Hunan San'an and Ideal plans to produce 2.4 million silicon carbide half-bridge power modules per year has completed the installation and commissioning of power equipment and will enter trial production after the production line is completed. Hunan San'an and STMicroelectronics jointly set up a joint venture foundry in Chongqing. Hunan San'an has a shareholding ratio of 51%, and ST has a shareholding ratio of 49%. The joint venture produces silicon carbide epitaxial and chips and exclusively sells chips to ST or its designated entities. It completed phased construction and gradual production in 2025, and is scheduled to reach a post-production capacity of 10,000 pieces/week in 2028. In order to guarantee the future material process requirements of the joint venture, Hunan San'an will set up a wholly-owned subsidiary in Chongqing to produce 8-inch silicon carbide substrates and supply them to the joint venture, reaching a post-production capacity of 480,000 pieces/year. This cooperation reflects the strength of the company's silicon carbide business in the international market and strengthens the company's ability to deliver products and serve customers; both sides give full play to their respective advantages, expand market production capacity and supply, and implement closed supply operations, which will help promote the energy-saving development of the electric vehicle industry, reduce product costs, promote the increase in product market penetration rate, enhance the company's industry position and core competitiveness, and will help expand the company's revenue scale and enhance the company's profitability.

Profit forecast, valuation and rating: Considering the downturn in the LED industry and weak downstream demand in the integrated circuit business, we lowered the company's net profit from 2023-2024 to 3.09 (performance downgraded -90.11%, same below) and 11.08 (-69.74%) to 11.08 (-69.74%) billion yuan, and increased net profit from 2025 to 1,643 billion yuan, corresponding to PE of 242x, 67x, and 45x respectively. We downgraded the company's rating to a “increase in holdings” rating.

Risk warning: LED chip prices are falling, Mini LED applications, compound semiconductor production capacity falls short of expectations, etc.