3Q23 performance fell short of our and market expectations

San'an Optoelectronics released its report for the third quarter of 2023:3Q23, single-quarter revenue of 3.686 billion yuan, YoY +13%, QoQ +3%; net profit of 0.03 billion yuan, YoY -95%, QoQ turned a loss into a profit; net profit from non-return net profit of 230 million yuan, YoY -115%, and the QoQ loss narrowed. Prices and operating rates in the company's LED and RF front-end sectors are still under pressure, causing the company's performance to fall short of our and market expectations, but we have seen that the company's revenue has achieved month-on-month growth for 2 consecutive quarters, and the bottom inflection point may have established the worst moment or is over.

Development trends

LED sector: The company's management said that since 2Q23, the prices of some chips have begun to rise along with the recovery of the overall domestic economy, and the equipment utilization rate has also shown an improvement trend. 3Q23 The company's asset impairment loss in a single quarter was -53 million yuan. We think it may have been reversed due to impairment losses, reflecting that LED chip prices have bottomed out and rebounded. Automobile Lamps (Anrui Optoelectronics) 1H23 had revenue of 1,069 billion yuan, YoY +22%, reflecting the company's active introduction of automotive lighting products on the customer side. Mini/Micro LED terminal market growth is still in the making.

RF front-end sector: Since 2Q23, factors such as inventory removal is nearing completion and end customer inventory replenishment have driven the company's GaAs PA production to increase month by month. Shipments of SAW filters and dual/multiplexer devices have increased, and the overall operating rate has gradually increased. We believe that with the arrival of the peak season for traditional consumer electronics in 3Q23, the company's RF front-end revenue may improve further. Zhuo Shengwei/Weijie Chuangxin/Wenmao 3Q23 revenue QoQ+48/+26/ +6% Power electronics sector: 1H23, Hunan San'an has revenue of 582 million yuan, YoY +179%, showing a rapid growth trend with the release of SiC production capacity. The company expects to launch self-developed vehicle regulation products around the end of the year. On June 27, San'an and STM announced that they plan to jointly invest 3.2 billion US dollars (about 22.8 billion yuan, San'an holds 51% of shares, STM holds 49%) to jointly build an 8-inch SiC extension and foundry in Chongqing. The company expects the new plant to be put into operation in 4Q25 and fully reach production in 2028, with a planned production capacity of 10,000 pieces/week. Meanwhile, San'an Optoelectronics plans to establish an 8-inch SiC substrate factory wholly owned locally. The company expects a total investment of 7 billion yuan and a planned production capacity of 480,000 pieces/year to meet the needs of the joint venture plant.

Optical technology sector: Currently, DFB and PD products are mainly deployed in the field of data communication, and have penetrated into the fields of WDM and automotive digital communication; in the non-digital communication field, they have now also entered leading mobile phone chain suppliers.

Profit forecasting and valuation

Considering that the company is still under pressure, by downgrading LED and RF revenue, we have lowered the company's 2023/2024 revenue by 20/ 25% to 140.01/16.450 billion yuan (YoY+6/ +17%), and reduced net profit of 78/ 53% to 3.44/1,053 billion yuan (YoY-50/ +206%). We switched the P/E valuation method from the previous P/E valuation method to the SOTP method to value the company (see text for the specific calculation process), and lowered the target price by 16% to 16.76 yuan (discount after valuation of the forward SiC sector and discount after selecting the LED sector and the RF sector with adjusted profit margins). There was 9% room for growth, maintaining an outperformance rating of the industry.

risks

The LED industry fluctuates cyclically, the penetration rate of Mini/Micro LEDs falls short of expectations, the consumer electronics boom is sluggish, and the introduction of SiC products falls short of expectations.