The EMS leader starts again and transforms the semiconductor packaging and testing business. Shenzhen Technology is the world's leading EMS company. It was founded in 1985 and has more than 30 years of rich product manufacturing experience. The company established a subsidiary Payton Technology in 2015 to enter the storage packaging and testing business. Currently, the company's main business is storage semiconductors, high-end manufacturing, and measurement intelligent terminals. In 2023, H1 achieved revenue of 7.741 billion yuan, an increase of 2.5% over the previous year. Judging from the business structure, H1 high-end manufacturing, storage semiconductor, and metering terminal businesses accounted for 65.1%, 17.6%, and 16.8% of revenue in 2023, respectively. On June 19, 2023, Zhou Gengshen, the former chairman of Payton Technology, became the acting chairman of Shenzhen Technology, reflecting the company's active layout and strategic transformation in the semiconductor packaging and testing business.

Storage for closed beta services opens up room for growth. Memory chips account for a significant share of the total integrated circuit market. According to Gartner data, the global DRAM market was US$81.6 billion and the NAND market was US$60.5 billion in 2022. In terms of market pattern, the global memory chip market is monopolized by the three major overseas manufacturers Samsung, Hynix, and Micron. According to Trendforce data, Samsung accounted for 45.1% of the global DRAM market in Q4 2022, while Hynix and Micron accounted for 27.7% and 23.0% respectively; according to CFM flash market data, Samsung accounted for 33.8% of the Q4 global NAND market in 2022. Kioxia, Hynix, and Western Digital accounted for 18.7%, 16.7%, and 15.8% of the shares respectively. Meanwhile, the rapid development of domestic storage manufacturers, such as Changcun Changxin, has brought domestic supply chain opportunities.

Looking at the packaging and testing side, the chip manufacturing process continues to be upgraded, and the storage density continues to increase, increasing the storage packaging process requirements.

New packaging technologies such as TSV and hybrid bonding (HB) are also widely used. Shenzhen Technology acquired 100% of Payton Technology's shares in 2015 and entered the storage test circuit. Payton Technology was once a wholly foreign-owned enterprise invested domestically by Kingston Technology in the US, providing a full range of closed testing services to customers around the world, including Kingston Technology. After the acquisition was completed, the company introduced industrial capital and local government investment several times to expand DRAM and NAND packaging production capacity. In 2023, H1 Payton achieved revenue of 1.91 billion yuan, an increase of 50.2% over the previous year.

The high-end manufacturing business continues to be steady. The company's high-end manufacturing business is mainly electronic equipment manufacturing, covering a wide range of fields such as consumer electronics, communications, hard drives, automotive electronics and medical electronics. It has been deeply involved in the EMS industry for 38 years and has a stable business scale. In H1 in 2023, the company's high-end manufacturing achieved revenue of 5.039 billion yuan, with a gross profit margin of 8.46%.

The profit growth of smart metering terminals has been highlighted. Downstream mainly covers smart meters, water meters, gas meters and other products. It has more than 20 years of experience and is widely sold to 40 countries around the world. In 2023, H1 won the bid for the national grid project again, maintaining profitability. In the first half of the year, the business achieved revenue of 1300 billion yuan, an increase of 103.28% over the previous year, and gross margin increased sharply to 32.03%, an increase of 15.4 pct over the previous year, contributing to the company's profit growth.

Investment suggestions: We expect the company's revenue for 2023-2025 to be 175.13/194.88/21,530 billion yuan respectively, net profit of 735/9.73/1,223 billion yuan respectively, corresponding to current price PE of 36/28/22 times. We are optimistic about the growth brought about by the company's transformation to storage testing. We covered it for the first time and gave it a “recommended” rating.

Risk warning: The semiconductor packaging and testing industry is undergoing cyclical changes; industry competition is intensifying; and customer acquisition falls short of expectations.