Key points of investment

Jacques Technology is the world's leading supplier of semiconductor precursors, providing a stable supply to leading fabs such as Hynix, Micron, and Samsung. In addition, the company lays out tracks for precursors, SOD, LNG sheets, silicon powder, electronic specialty gases, photoresist risks in a single industry. If the downstream storage boom gradually recovers, the penetration rate of advanced products such as HBM increases, and the company's production capacity expansion is released, the pressure on the company's precursor business is expected to improve in the short term.

Senior flame retardant suppliers have entered the electronic materials circuit through many mergers and acquisitions, and the company's operations have reached a new level.

The company was founded in 1997, with flame retardants as its main business. After listing on the Shenzhen Stock Exchange in 2010, the company actively explored and transformed, carried out mergers, acquisitions, restructuring and industrial upgrading around the semiconductor materials business, and incorporated manufacturers such as Huafei Electronics, Chengdu Kemet, Korea's UP Chemical, and LG colored glue division, thus expanding business categories such as precursors, LNG sheets, silicon powder, electronic specialty gases, and photoresist adhesives. The business situation improved greatly after the company sought to enter the electronic materials field in 2017. In 2022, the company's revenue was 4.259 billion yuan, +12.61% year on year; net profit to mother was 524 million yuan, +56.61% year over year, reaching a record high. The compound growth rates of the company's revenue/net profit from 2017 to 2022 were 30.3% and 71.8%, respectively. In terms of segments, the photoresist and supporting reagent business and the semiconductor chemical materials (precursor) business had revenue of 1,259 billion yuan and 1,143 billion yuan respectively in 2022, which were the two highest revenue segments of the company. Furthermore, the LNG sheet business grew rapidly, with revenue of 37 million yuan in 2018 increasing to 403 million yuan in 2022.

The results of the company's platform-based strategic layout are beginning to show, and it has performed well in fields such as precursors, SOD, LNG sheets, silicon powder, electronic special gas, and photoresist.

The company's main business is rich in categories, including precursors, SOD, LNG sheets, silicon powder, photoresist, etc.: 1) Precursors and SOD: Japan's Fuji Economy and QY Research and other institutions estimate the global precursor market to be US$2,021 billion in 2024, with a domestic market concentration of US$779 million. Merck, Intel, Samsung, France Aerospace, Soul Brain, Samsung SDI, and Jacques Technology are leading global market manufacturers. With the continuous development of logic and memory chips, laminated thin film deposition technology is becoming more and more widely used, and it is expected that the precursor market will continue to grow rapidly. 2) LNG sheet: In 2022, due to factors such as the Russian-Ukrainian conflict and rising crude oil prices, the natural gas industry entered a boom cycle, driving explosive growth in the LNG storage and transportation equipment manufacturing industry. The company is the only domestic supplier of LNG insulation boards certified by GTT and the Classification Society. The product quality has reached the same leading level abroad. It has signed contracts for more than 80 LNG carriers and dual-fuel container ships with Hudong Shipyard, Jiangnan Shipyard, and Dalian Shipyard. 3) Silicon powder: The prospectus of Lianrui New Materials predicts that the domestic silicon powder market is expected to exceed 20 billion yuan in 2025, with a CAGR of 14.3% in 2018-2025. Currently, China's high-end spherical silicon powder is mainly imported, and the Japanese company Yaduma has a monopoly on the spherical silicon powder market below 1 micron. Representative domestic spherical silicon powder companies include Lianrui New Materials, Yishitong, Huafei Electronics, etc. 4) Electronic special gas: Data such as SEMI and TECHCET predict the 2023 global electronic gas market of 6.95 billion US dollars and the domestic market of 24.9 billion yuan. SK Materials, Kanto Denka, Showa Electric, and CSIC have a large share advantage in the electronic special gas segment. The company's electronic specialty gas business is mainly sulfur hexafluoride and carbon tetrafluoride, which are mostly used for cleaning and etching. It has maintained close cooperation with well-known manufacturers such as SK Hynix, Samsung Electronics, Toshiba, Intel, TSMC, LG, and BOE. 5) Photoresist:

According to data from Reportlinker, China Business Industry Research Institute, etc., the global photoresist market in 2021 was about US$11.3 billion, and the domestic market was about 9.33 billion yuan. Panel photoresists are dominated by Japanese and Korean manufacturers. The localization rate of color photoresists and black photoresists is only 5%, while TFT wiring photoresists are mostly imported. In 2020, the company acquired LG Chemical's color photoresist division and COTEM from Korea to enter the LCD panel photoresist field.

HBM has become the mainstream configuration for high-end AI servers, and demand for related precursor materials and localization are expected to accelerate.

The rapid development of AI models places higher demands on memory chips. Currently, high-end AI server GPUs equipped with HBM chips have become mainstream, and demand for high-bandwidth memory chips (HBM) is expected to usher in a phase of rapid growth.

Omdia predicts that the DRAM market will have a CAGR of 21% and an HBM of 52% for 2023-2027. Among them, HBM will account for more than 10% of the DRAM market in 2023, and is expected to be close to 20% in 2027. The development of advanced manufacturing processes such as HBM places higher and higher requirements on the number and quality of thin film deposition, which in turn is driving a further increase in demand for advanced precursor materials. As a leading domestic and international mainstream semiconductor precursor supplier, the company has maintained close supply cooperation with leading international HBM manufacturers such as SK Hynix for many years. It is expected to expand downstream customers in the context of the rapidly developing AI chip industry, actively introduce domestic production lines, and further increase the scale of revenue and profit.

Short-term performance is under pressure. SKC shares were purchased in the wet electronic chemicals sector, and the platform-based layout continued to improve.

Affected by production cuts by downstream storage manufacturers such as Samsung, SK Hynix, and Micron, demand for semiconductor materials such as drivers declined markedly before 2023, and sector performance declined in the short term. However, demand for LNG sheets is strong, the company is currently receiving sufficient orders, and the development and introduction of new products for photoresist, precursors, and silicon powder is smooth, and the overall business situation is manageable. In September 2023, the company announced the purchase of 75.10% of SKC-ENF's shares held by SK Enpulse at a price of no more than 50 billion won (approximately RMB 274 million) to enter the field of wet electronic chemicals such as developers, etching solutions, and diluents, and the company's platform-based layout was further improved. In the future, the company's performance is expected to grow rapidly as the prosperity of the storage industry recovers, domestic penetration rate increases, and the company's platform-based strategy continues to improve.

Profit forecasting and valuation

As one of the domestic electronic materials platform companies, the company has a broad product layout and mass production capacity for products such as precursors, SOD, LNG sheets, silicon powder, electronic special gas, photoresists, etc., and downstream customers have high quality and strong stability. Considering the trend of localization of semiconductor materials and the company's production expansion progress, we believe that the company still has broad room for growth in the medium to long term. The company's revenue for the next three years is estimated to be 47.52/61.28/8.038 billion yuan, up 11.57%/28.96%/31.17% year on year; net profit attributable to mother was 6.31/9.73/1.305 billion yuan, up 20.43%/54.10%/34.18% year on year, corresponding to 2023-2025 PE 40/26/19 times, respectively. Covered for the first time, a “gain” rating was given.

Risk warning

The risk of changes in the macro environment, the risk of increased industry competition, the risk of exchange rate fluctuations, and the risk of management integration.