Incidents:

The company announced on December 6 that it plans to raise no more than 1.2 billion yuan in capital from domestic natural persons and institutional investors, with an issuance volume of 8.040 million shares. The funds raised will be used for investment after deducting related issuance expenses: high-precision mask production base construction project phase I, high-end semiconductor mask production base construction project phase I.

New construction projects help the semiconductor mask business advance, and there is an urgent need for localization:

The “High-end Semiconductor Mask Production Base Construction Project Phase I” project is expected to have a construction period of 36 months. The main product is a high-end semiconductor mask covering the 250nm-65nm process. The total investment is 604 million yuan, and it is planned to raise 600 million yuan in capital. The company's semiconductor business revenue for the first half of 2023 was 61.61 million yuan, accounting for 14.90% of the main business.

According to the SEMI2023 June analysis report, sales in the global semiconductor materials market increased 8.9% in 2022 to reach 72.7 billion US dollars, surpassing the previous market point of 66.8 billion US dollars set in 2021. Sectors such as silicon, wet chemicals, and masking plates showed the strongest growth in the wafer manufacturing materials market. This project will improve the technical capacity and production capacity of the company's semiconductor mask products, optimize the company's mask product structure, and increase the company's market share in the semiconductor mask version. The company has achieved customer testing, certification and mass production of the 180nm process node semiconductor chip mask version, and has simultaneously carried out process research and development of the 130nm-65nm semiconductor chip mask version and the mask version process development plan required for 28nm semiconductor chips.

Domestic alternatives are superimposed on new product development, and panel mask versions continue to be booming:

The “High Precision Mask Production Base Construction Project Phase I” project is expected to have a construction cycle of 24 months. The main product is the flat panel display mask version, which is one of the core materials in the upstream of the flat panel display industry chain. It plans to invest a total investment of 80,001 million yuan and a planned investment of 60,000 million yuan to raise 60,000 million yuan. It mainly produces high-precision mask versions of 8.6 generation and below, and is used in flat panel display mask products such as a-Si, LTPS, AMOLED, LTPO, and MicroLED. According to Omdia data, the global sales revenue of mask versions in the 8.6th generation and below flat panel display industry is expected to reach 129.3 billion yen in 2027, accounting for 93.5% of global flat panel display industry mask sales. Demand for mask versions in the 8.6th generation and below flat panel display industry will maintain steady growth. Demand for mask plates in mainland China's flat panel display industry will continue to rise. It is estimated that by 2026, mainland China's flat panel display industry will account for 60% of global demand for mask plates. The localization rate of high-precision mask versions such as AMOLED/LTPS in 2022 is still only 9%, so there is plenty of room for domestic replacement. After the project is completed and put into operation, it will increase the production capacity of the company's flat panel display mask version, increase the degree of localization and support level of the high-precision flat panel display mask version, and fill the gap in the domestic industry. The company has achieved mass production of the 8.6th generation high-precision TFT mask version and the 6th generation of high-precision AMOLED/LTPS mask versions, etc., and is gradually promoting the development of high-precision AMOLED/LTPS mask plates of the 6th generation and the planning and development of high-specification semi-permeable film masks.

The performance of the first three quarters increased steadily, and profitability continued to improve:

The company achieved operating income of 668 million yuan in the first three quarters, an increase of 21.97% over the previous year, and net profit of 95 million yuan. A year-on-year increase of 36.87%. The company's Q3 quarterly gross margin was 29.48%, up 2.80pcts year on year; net profit margin was 16.48%, up 2.00pcts year on year. The company's revenue rose in the first three quarters, mainly because customers increased their efforts to develop new products, which led to an increase in demand for mask versions, and the number of orders accepted by the company increased. The increase in the company's net profit in the first three quarters was mainly due to the high utilization rate of the company's overall production capacity, structural optimization of products, business and customers. Product profitability was superior to the same period last year. We believe that in the future, with the expansion of the company's overall production capacity and technical level upgrading, market share and profitability are expected to further increase.

Investment advice:

According to the semi-annual report, the fund-raising project has started phased construction based on the company's own capital. We expect the company's revenue for 2023-2025 to be 950 million yuan, 1,213 billion yuan, and 1,557 million yuan respectively, and net profit of 139 million yuan, 189 million yuan, and 234 million yuan respectively, corresponding to EPS of 0.52 yuan, 0.71 yuan, and 0.88 yuan respectively. Taking into account the urgent need for localization in the mask industry, the company's leading position in the flat panel display mask version market, and future production capacity expansion, the company was given 40 times PE in 2024, corresponding to a target price of 28.4 yuan for 12 months, maintaining a “buy-A” investment rating.

Risk warning: policy changes and uncertainty in the trade situation; risk of relying on imports of equipment and materials; risk of asset-heavy management; progress of new products falling short of expectations; capacity expansion falling short of expectations, etc.