High-end cleanroom service leaders benefit from the accelerated upgrading of domestic strategic industries, giving “buy” rating companies fertile ground for domestic high-tech industry investment and development, gradually replacing overseas service providers, and developing into one of the leading high-end clean room services in mainland China. Downstream covers key national industries such as semiconductors and pan-semiconductors, new displays, life sciences, food, medicine, and health. In the short term, as the semiconductor industry chain shifts to the mainland, there is plenty of room for chip localization and replacement, and domestic enterprises are increasing their investment; in the context of a long-term manufacturing powerhouse, investment in the high-tech industry is expected to maintain rapid growth, driving demand for high-end clean room construction. We expect the company's net profit from 23-25 to be 2.65/3.57/459 million yuan, which is comparable to the company's unanimous expectation of PE of 18x in '24. Considering the company's broad coverage of leading domestic semiconductor customers, it is expected to fully benefit from accelerated localization, and good asset quality and cash flow performance, giving the company a “buy” rating of 25xPE in '24, with a target price of 17.10 yuan for the first time.

The improvement of technological standards promotes the rapid development of China's cleanroom engineering industry Clean room engineering is an integrated solution for design, construction, and construction for a certain space. Currently, IC semiconductors, photoelectric panels, food and medicine industries are the most important downstream applications. Since the 90s, China's technological level has been booming, driving the rapid development of China's cleanroom industry. The market size has grown from 768 billion yuan in 2015 to 247.7 billion yuan in 2022, and the CAGR is about 17.7%. As the country's industrial upgrading progresses, investment in strategic emerging industries is expected to maintain rapid growth. According to the State Council's State-owned Assets Administration Commission, the cumulative investment completed by 23H1 central enterprises in strategic emerging industries increased by more than 40% year-on-year, accounting for an increase of 14pct to 27% of total investment over 2018, which is expected to drive the continuous expansion of the clean room engineering market.

The boom in the semiconductor industry is expected to pick up, and domestic substitution is speeding up

According to IC Insights data, the global semiconductor industry is expected to spend 156 billion US dollars in capital expenditure in 2023, -14% year on year, and return to positive growth in 2024. The semiconductor industry in mainland China is highly dependent on imports, and domestic substitution has spawned new demand. In 2021, China's chip self-sufficiency rate was only 16.68%, and the self-sufficiency rate for core basic components and key basic materials is planned to reach 70% in 2025. According to Omdia, the capital expenditure of integrated circuits in mainland China is expected to be US$204/25.2 billion in 2023/2024, respectively, and is expected to continue to grow rapidly. The capital expenditure of leading domestic companies bucked the trend, representing the company SMIC, adjusted its capital expenditure plan for 2023 to around US$7.5 billion at the third quarter results briefing on November 10.

The competitive pattern for high-end cleanrooms is good. Domestic private enterprises have both high efficiency and alternative advantages. Technology and experience barriers in the high-end cleanroom field are high, and customer stickiness is high, and only a few leading companies occupy the market.

Focusing on the electronics sector, the company has successively participated in projects such as the most technologically advanced and largest 12-inch semiconductor factory in China at the time, and the first dynamic random access memory chip design and manufacturing integration for mass production in China. The coverage of leading domestic semiconductor companies among downstream customers is wide, and it is expected that they will fully benefit from the recovery of the industry and the acceleration of domestic production substitution. At the same time, management stability is higher than that of peers, and asset quality and cash flow performance are superior.

Risk warning: The capital expenditure of the domestic semiconductor industry fell short of expectations; the gross margin of the semiconductor cleanroom engineering business fell more than expected; and the company's new orders or conversions fell short of expectations.