Key points of investment
The company is a leading manufacturer of precision components for semiconductor equipment in China, and is also one of the few precision parts manufacturers in the world that can mass-produce semiconductor equipment used in the 7nm process. The company's profits are under pressure in the short term due to factors such as downstream market demand, the company's product structure adjustments, and a mismatch in the company's production expansion pace. In the future, as industry prosperity increases, the company's product structure is optimized, and production bases such as Nantong, Beijing, and Singapore release production capacity, the company's performance is expected to break through further.
Affected by factors such as product restructuring and mismatch in the pace of production expansion, the Q3 ratio was -42.13% compared to the same period last year.
The company's 2023 three-quarter report revealed that Q3's revenue was 561 million yuan, +35.37% month-on-month, +15.26%, net profit to mother of 0.36 billion yuan, -42.13% year-on-year, and -35.46% month-on-month; overall revenue for the first three quarters of 2023 was 1,390 million yuan, year-on-year +37.28 billion yuan, and net profit of 132 million yuan, or -19.15% year-on-year. The large year-on-month decline in net profit from 23Q3 was mainly due to changes in the product structure, with a sharp increase in the revenue share of module products, which account for relatively high raw material costs and relatively low gross profit; the revenue growth of component products that take up a lot of machinery and equipment fell short of expectations, and the pace of production of the company's early investment in machinery and equipment was mismatched with industry sentiment, and the scale effect was not yet reflected; the company reserved talents for many factories and carried out management improvements, leading to a combination of factors such as an increase in management and sales expenses.
The semiconductor component market continues to expand due to the expansion of new production lines in fab factories and the increase in the domestic penetration rate of equipment.
In 2022, China became the world's largest semiconductor equipment market for the third year in a row, with a space of about US$28.27 billion; challenges in the macroeconomic situation in 2023 and weak semiconductor demand brought short-term pain to global semiconductor equipment and component manufacturers. Production cuts or delays in production expansion by mainstream fabs affected equipment delivery, which in turn affected the pace of upstream component procurement. SEMI predicts that in 2023 and 2024, mainland China will remain one of the top three markets for equipment spending, and the global semiconductor equipment market may experience a strong rebound in 2024. As domestic demand for semiconductor equipment continues to rise, taking into account China's policy support and technological breakthroughs, the proportion of global semiconductor equipment manufacturers purchasing precision components for domestic semiconductor equipment is expected to continue to increase, and the parts market will continue to expand.
Plant construction in Shenyang, Nantong, Beijing, Singapore, and the US is progressing steadily.
The company's multi-plant layout continues to advance. Production at the Shenyang plant is progressing steadily. The production bases in Nantong and Beijing have already prepared personnel and resources ahead of schedule. The Nantong plant is expected to be put into operation this year and reach production in 2025. According to reports, the total planned annual output value of the factory in Nantong and Beijing is about 4 billion yuan, which is expected to greatly increase the company's current production capacity after delivery. Furthermore, in overseas markets, factories in Singapore and the US are currently being built in an orderly manner according to the plan, and production is expected to begin one after another in 2024. The overseas factory layout is an effective response to changes in the international situation, providing support and assistance for the company's module business, key material insurance, and providing guarantees for business continuity and risk hedging for overseas customers.
Profit forecasting and valuation
Considering that the company is a leading manufacturer of precision components for semiconductor equipment in China, it is also one of the few precision parts manufacturers in the world that can mass-produce semiconductor equipment used in the 7 nm process. Although the company's performance in 2023 was under short-term pressure in the context of the downward semiconductor cycle and the tightening of trade policies between China and the US, and the year-on-year growth rate of revenue/net profit declined compared to the same period in 2022, we are still optimistic about the rapid development of the company's precision parts business in the medium to long term. We expect the company's 2023-2025 revenue to be 20.32/29.34/4.090 billion yuan, up 31.58%/44.39%/39.37% year on year; net profit to mother 2.04/3.32/476 million yuan, year-on-year growth rate -17.08%/63.07%/43.22%, corresponding to 80/49/34 times PE, maintaining a “buy” rating.
Risk warning
The recovery in semiconductor demand falls short of expectations; risk of deterioration in the international trade environment; risk of supply chain tension or breakdown; risk of fab expansion falling short of expectations; risk of deteriorating competitive landscape, etc.