Key points of investment

Semiconductor market demand & component localization demand contributed to a significant year-on-year increase in revenue, and product restructuring and continuous R&D investment put pressure on the company's performance. The company focuses on precision manufacturing technology for metal material parts, and has mastered various manufacturing processes such as precision machinery manufacturing, surface treatment special processes, welding, assembly, and inspection that can meet strict standards. The main products include process parts, structural components, module products, and gas pipelines, which are used in semiconductor equipment, pan-semiconductor equipment and other fields. In the semiconductor field, the company's related products are widely used in advanced process equipment such as etching, thin film deposition, lithography and gluing, chemical mechanical polishing, and ion implantation, which are at the core of wafer manufacturing. 2023Q3 achieved revenue of 561 million yuan, an increase of 35.37% over the previous year; with 2023Q1-Q3, the company achieved revenue of 1,390 million yuan, an increase of 37.28% over the previous year; the company's revenue growth was mainly driven by domestic semiconductor market demand and demand for localized components. In 2023Q3, the company's net profit was 36 million yuan, a year-on-year decrease of 42.13%; the net profit of 2023Q1-Q3 was 132 million yuan, a year-on-year decrease of 19.15%; the main reason is: (1) The company's Nantong and Beijing factories reserve talents in advance. As of 2023Q3, labor costs have increased by 31 million yuan, and depreciation and amortization expenses have increased by 16 million yuan.

(2) The company's product structure has changed, and the share of revenue of module products with relatively high raw material costs and relatively low gross profit has increased dramatically. Revenue growth for component products that use a lot of machinery and equipment fell short of expectations. The pace of production of machinery and equipment invested by the company in advance was mismatched with industry prosperity, and the scale effect was not yet reflected; (3) the company continued to increase investment in R&D expenses, and R&D expenses and proportions increased dramatically. 2023Q1-Q3 invested 57 million yuan in R&D, an increase of 75.73% over the previous year, accounting for 10.22% of operating income, an increase of 2.35 percentage points over 2022Q1-Q3. (4) Increase in non-recurring profit and loss.

All types of equipment components account for more than 50% of the global semiconductor equipment market. The company mainly covers three segments: mechanical parts, mechatronics, and gas/liquid/vacuum systems. According to information publicly disclosed by domestic and foreign semiconductor equipment manufacturers, more than 90% of the equipment cost composition is generally raw materials (that is, different types of precision component products). Considering that the gross margin of international semiconductor equipment companies is generally around 40%-45%, the overall precision parts market is about 50%-55% of the global semiconductor equipment market. The company mainly involves three segments: mechanical components, mechatronics, and gas/liquid/vacuum systems. (1) Mechanical parts (including process and structural parts): The company focuses on metal mechanical parts and does not currently involve non-metallic mechanical parts. It accounts for 20%-40% of equipment costs. Equipment plays a role in constructing the overall framework, infrastructure, wafer reaction environment, and special functions of components, ensuring reaction yield and extending the service life of equipment. The company is one of the few domestic suppliers to enter international semiconductor equipment manufacturers in this segment. It can achieve mass production of some advanced equipment components used in the 7nm process and directly compete with international manufacturers. (2) Mechatronics category (including module products that are not gas cabinet modules): accounts for 10%-25% of equipment costs. It plays a role in realizing wafer loading, transmission, motion control, and temperature control in equipment. Some products include mechanical products. The company mainly involves module products with relatively simple functions, such as cavity modules and etching valve modules. Compared with international manufacturers such as Jingding Precision, there is still a certain gap. Furthermore, domestic semiconductor equipment manufacturers still mainly procure non-modular components and assemble them on their own, so there are few domestic manufacturers engaged in the business of products that can be compared with the company. (3) Gas/liquid/vacuum system category (corresponding to gas pipelines and gas cabinet module products): accounts for 10%-30% of the cost of equipment, and plays a role in transmitting and controlling special gases, liquids, and maintaining vacuum in equipment.

Among them, gas transport/vacuum systems are mainly used in dry process equipment such as thin film deposition equipment, etching equipment, and ion implantation equipment. The pneumohydraulic system category is mainly used in chemical machinery polishing equipment and cleaning equipment.

The product continues to be optimized to the module category, and each plant construction/capacity release is being carried out in an orderly manner. (1) In terms of product structure: 2023H1, the company's product structure is continuously optimized from single-piece customization to modular optimization. The total main business revenue of module products and gas pipelines increased by 94.89% compared to 2022H1; in the future, the share of the company's gas pipelines and module products will continue to increase, and as the scale advantages of such products expand, the company's bargaining power on the supply chain side will gradually increase, and related raw material procurement costs will also decrease. Modular procurement is the mainstream trend in China's semiconductor industry. Benefiting from the continuous increase in the number of domestic semiconductor equipment companies, module procurement volume is expected to increase, so the company's module growth rate in 2024 is expected to exceed the component growth rate. (2) In terms of plant construction/capacity release: As of September 1, 2023, the company's domestic production bases include Shenyang Plant, Beijing Plant, and Nantong Plant. The Nantong plant began operation this year and will reach production in 2025, with an annual production capacity of 2 billion yuan. The company's overseas factory layout is being carried out according to plan, reflecting the value of globalization and providing a guarantee for business continuity and risk hedging for overseas customers. Currently, plants in Singapore and the US are being built in an orderly manner according to the plan, and it is expected that production will begin one after another in 2024. The construction of overseas factories can promote the development of the company's entire international supply chain, provide support and assistance for the company's module business and key material insurance, thus achieving business goals.

Investment suggestions: We forecast that the company's operating income from 2023 to 2025 will be 19.44/27.33/3.887 billion yuan, with growth rates of 25.9%/40.6%/42.3%, respectively; net profit of 2.06/3.28/431 billion yuan, respectively; growth rates of -16.3%/59.6%/31.2% respectively; corresponding PE 81.6/51.1/39.0 respectively. Considering that Fuchuang Precision is one of the few precision component manufacturers in the world that can mass-produce semiconductor equipment applied to the 7 nm process, as domestic demand for semiconductor equipment continues to rise, and considering China's policy support and technological breakthroughs, in the context of autonomous control of the semiconductor core industry chain, it is expected to accelerate the domestic replacement process of semiconductor equipment, provide historical opportunities for the company's development, provide historical opportunities for the company's development, cover it for the first time, and give -A suggestions for increasing holdings.

Risk warning: the risk of international trade friction; market competition risk; the risk that wafer manufacturers are building new fabs and expanding production faster than expected; the company's R&D progress falls short of expectations; and the risk that R&D cannot keep up with process evolution and semiconductor equipment updates and iterations.