The price of 2023Q3 medium and large panels reached a stage high. The company's various production lines maintained a high operating rate while continuously optimizing the product structure, with significant performance improvements. Looking ahead, at the industry level, as terminal demand gradually picks up, inventory levels return to health, and the operating rate of downstream panel factories is expected to continue to rise, we expect industry prosperity to gradually rise; at the company level, the company is a leading domestic polarizer manufacturer with rapid expansion of production capacity while continuing to promote product restructuring, focusing on high-value fields such as OLED, automotive, VR, and large-size TVs, which are expected to usher in a period of accelerated growth. We are optimistic about the growth momentum of the company's performance and maintain the “buy” rating.

The performance of 2023Q3 company improved significantly from month to month, and the product structure continued to be optimized. The company achieved revenue of 1,539 billion yuan in the first three quarters of 2023, -7.40% year-on-year; net profit from net income from the mother and net profit after deducting non-return net profit was 0.58/ 042 million yuan, respectively, -68.81%/-74.83% over the same period last year. Gross profit margin was 14.22%, y-7.56pcts, net profit margin 3.82%, y-7.79pcts. Looking at Q3 in a single quarter, the company achieved revenue of 567 million yuan, -0.53% over the same period, +3.73% over the previous year; net profit/net profit after deduction of non-return net profit of 0.34/30 million yuan, -31.26%/-24.41%, compared with Q2, a significant increase of 0.12/0.08 million yuan. Non-recurrent profit and loss was mainly government subsidies of 5.35 million yuan and income from entrusted investment and asset management of 2.34 million yuan; gross profit margin of 15.11%, y-5.09pcts, +1.81pcts, month-on-month, net profit margin of 6.07% 2.81pcts, +3.91 pcts month-on-month. The company's performance is generally in line with expectations. We believe that the significant month-on-month improvement in 23Q3 performance is mainly due to the fact that the price of large panels in the downstream reaches a stage high during the reporting period. The company's various production lines maintained a high operating rate. At the same time, the company continued to optimize its product structure, and the gross profit margin and net profit margin rebounded. Looking ahead to 23Q4, although prices and demand for medium and large panels declined after the peak season, the company's production capacity was relatively small, and it is expected that production capacity will be absorbed through active order development. At the same time, prices and demand for small to medium sized panels are gradually picking up, OLED products are mass-produced and shipped, and mobile phone orders are positive. We expect the company's 23Q4 performance to remain stable. In the long run, the company's production capacity is expanding rapidly while continuing to promote product restructuring. The release of high-value products such as OLED, automotive, and VR is expected to accelerate from 2024, and is expected to increase profitability after 55-inch and above TV products are shipped. We are optimistic about the company's medium- to long-term development potential.

The three-in-one layout of production, construction, and investment has great flexibility for long-term production expansion. The company currently has four major production bases: Shenzhen ****, Shenzhen Longgang, Shenzhen, Hefei, Anhui, and Putian, Fujian. In 2022, the company's polarizer production was 26.91 million square meters, +7% over the same period last year. 6 production lines have been fully produced, 2 are under construction, and 1 is yet to be built. The small-sized Longgang production line has a design capacity of about 12 million square meters per year and was put into operation in 21H2. Judging from the quality rate, the production capacity climb up to 22Q3 has been completed, with a yield rate of over 90%, while the utilization rate continues to increase. Full production was achieved in July '23. Currently, it is mainly TV and IT. It is expected that the product structure will continue to be optimized in the future. In the future, the company plans to gradually optimize the product structure, focusing on mobile phones and IT. 1) Production line under construction: The production capacity of the Putian production line, which focuses on vehicles, is about 6 million square meters per year, and 22Q4 has entered the small-batch trial production stage. Currently, trial production has ended, and production capacity is rising. According to the company's 23Q3 performance meeting, in '23, the production line will first focus on TV and IT products, and will shift more to vehicles later; the oversized Hefei Phase II 1720mm production line is designed with an annual production capacity of 30 million square meters. The company expects trial production to begin in early '24, and can contribute to full production in '25. Revenue exceeds 2 billion yuan 。 2) New investment: The construction of a 2520mm and 1720mm polarizer production line project for displays is planned in Huanggang City, Hubei Province, with a design capacity of 140 million square meters. The company expects an annual output value of 10 billion yuan after delivery. The first phase of the project has an investment of 5 billion yuan and a design capacity of 70 million square meters. The company expects an annual output value of 5 billion yuan after delivery. At present, the first phase of the project has started construction. The goal is to officially start production by the end of 2024 and reach production by the end of 2025. The company's production expansion rate is among the highest in the industry. Considering the Huanggang production line, we predict that the effective production capacity area put into operation by the company will increase from 41.2 million square meters/year to 106.2 million square meters/year in 2023-2025, with a CAGR of 38% during the period; without including the Huanggang production line, we predict that the effective production capacity area put into operation by the company will increase to 71.2 million square meters/year in 2025, with a CAGR of 21% during the period. Currently, the company's downstream customers include leading global panel manufacturers and mobile phone module manufacturers such as BOE, TCL Huaxing, Huike, Shentianma, Tongxingda, Helitai, etc., and obtained BOE Class A supplier qualification in 22H1. We believe that the company is expected to enjoy panel localization dividends by deeply connecting with downstream high-quality customers, and its market share is expected to increase in the future.

The product structure continues to be upgraded, and the release of OLEDs and vehicles is expected to accelerate. The company has adopted a differentiated competitive strategy. The next three years will focus on high-value fields such as polarizers for high-end mobile phones/IT/automobile/VR, which is expected to drive a continuous increase in profitability. 1) In the OLED field, according to the company's performance exchange meeting, the company's OLED products have passed certification from major downstream panel manufacturers and obtained project orders. 23H2 has gradually achieved batch supply, and the annual shipment scale is expected to reach 5KK films. According to downstream intended orders, the company expects the shipping scale to reach 10KK film/month in 2024. The company is leading the industry to achieve a breakthrough in the localization of OLED polarizers. We are optimistic that it will rapidly expand and contribute to performance under the trend of localizing panel raw materials; 2) In the automotive sector, according to the company's performance exchange meeting, the company's current main applications of automotive products Among central control displays and HUDs, etc., HUD and rear-row entertainment screen products are already supplied in small batches, and central control products are expected to achieve a breakthrough in 23Q4. Currently, the localization rate of automotive polarizer products is low, and the company's technology and layout are leading. We expect to accelerate release in 2024 after passing relevant verification; 3) In the VR field, the company mainly lays out optical films to support Pancake, develop, and purchase optical films that are customized and cut. It is the first manufacturer in mainland China with mass production and supply capabilities. According to the company's performance exchange meeting, the company is currently continuing to develop next-generation new products. The company expects to complete verification by the end of the year, achieve mass production in 24Q1, and actively introduce other important international customers. The “light, thin, and small” advantages of the Pancake solution are outstanding, and penetration is expected to accelerate as costs fall. We are optimistic about the company's growth potential in this field. Overall, the company's high-end products continue to break through, and with the launch of new lines in Longgang and Putian and the post-production product structure are expected to be adjusted. We expect that the company's share of high-end mobile/IT/vehicle revenue will increase significantly, and product structure optimization is expected to drive a continuous increase in profitability.

External procurement+endogenics actively promote the localization of upstream materials, reducing costs and increasing efficiency, highlighting competitive advantages. In terms of fixed investment, the company adopted a low-cost independent line construction strategy, which significantly reduced production line investment and unit depreciation costs; in terms of production process, the company adjusted Hefei Phase II to a 1720mm wide production line, increasing the utilization rate of 43/55/65 inch cutting. At the same time, due to the rapid localization process of raw materials, it is expected to bring relative cost advantages; the company has automated design and transformation of the small-size cutting process to reduce costs and improve yield. The advantages are highlighted under industry pressure. In terms of material supply, according to the company's 2023 mid-year report performance exchange conference, the company plans to localize all raw materials within three years. Currently, PVA and TAC have been gradually introduced to domestic suppliers, and the localization rate of protective film, PET, surface treatment film, glue, etc. continues to increase. The new 65-inch TV production line is domestic materials, and it is expected that TAC will accelerate the introduction of localization starting in 24; in addition, the company's endogenous layout of the industrial chain, is planning production lines for optical films and polymer polymers for liquid crystal displays in Guangshui City. We believe that the company continues to optimize fixed investment, material costs, production processes, etc., and has achieved remarkable results in cost reduction and efficiency. In the future, with the gradual release of domestic polarizer production capacity, the company's cost control advantages will bring out competitiveness, which is expected to drive a continuous increase in market position.

Risk factors: weak downstream demand; falling polarizer prices; the company's new production line progress falls short of expectations; excessive supply and demand in the industry; slow upstream domestic substitution, etc.

Investment suggestion: As a leading domestic polarizer manufacturer, the company is rapidly expanding production capacity while continuing to promote product restructuring, focusing on high-value fields such as OLED, automotive, VR, and large-size TVs. It is expected that it will usher in a period of accelerated growth. We are optimistic about the growth momentum of the company's performance. However, due to weak terminal demand since 2022 and production control by downstream panel manufacturers, the company's progress in optimizing the product structure of the company's new production line has slowed. We adjusted the company's net profit forecast for 2023-2025 to 0.94/3.08/502 million yuan (the original forecast was 0.95/367/579 million yuan), and the corresponding EPS forecast was 0.54/1.77/2.89 yuan. Considering that the company is in a stage where production capacity is rapidly climbing and performance is growing rapidly, we chose the 2024 PE multiplier for valuation. We selected panel materials leaders Changxin Technology and Luwei Optoelectronics as comparable companies. The comparable company Wind in 2024 unanimously anticipated that the average PE value would be 25 times. We gave the company 25 times PE in 2024, corresponding to the target price of 44 yuan, maintaining the “buy” rating.