occurrences

On February 19, the company disclosed its 2023 annual business report. In 2023, it achieved operating income of 1,629 billion yuan, an increase of 23.71% over the previous year; realized net profit of 370 million yuan, an increase of 22.10% over the previous year; and realized net profit without return to mother of 325 million yuan, an increase of 19.93% over the previous year.

Key points of investment

Annual results increased year-on-year, and Q4 revenue and profit grew significantly. The performance forecast shows that in 2023, the company achieved operating income of 1,629 billion yuan, an increase of 23.71% over the previous year; achieved net profit of 370 million yuan, an increase of 22.10% over the previous year; and realized net profit without deduction of 325 million yuan, an increase of 19.93% over the previous year. With demand picking up and customer product development, the company achieved significant growth in Q4 2023 in both revenue and profit. Looking at Q4 alone, we achieved operating income of 482 million yuan, +43.58% year over month; realized net profit of 125 million yuan, +122.23% year on year, +2.02% month on month; realized net profit without return to mother of 109 million yuan, +106.17% year on year, and -3.80% month on month. In 2023, demand for packaging testing of non-display chips such as display driver chips, power management chips, and RF front-end chips picked up. The company continued to expand packaging and testing production capacity, continuously improve product quality and service quality, increase development efforts for new customers, and continue to increase the development of new products, so that the company's packaging and testing revenue continued to grow rapidly. The company's revenue growth in the non-display business since the third quarter of 2023 is mainly due to the growth of the RF front-end chip packaging and testing business. The main incremental customers include Weijie Chuangxin and Onruiwei.

The Hefei sealing and testing base is expected to begin mass production in Q1, customer demand will pick up, and total assets and owners' equity will increase significantly. At the end of 2023, the company's total assets were 7.158 billion yuan, an increase of 48.41% over the previous year. The main reason was that the company's initial public offering of shares raised in 2023, and accounts receivable and inventory increased normally as performance increased. Also, due to the recovery in customer demand and the construction of an advanced packaging testing and production base in Hefei Qizhong, the company purchased equipment to expand production capacity and fixed assets. The Hefei plant completed the equipment installation ceremony in August 2023. Mass production is expected to begin in Q1 2024. The production capacity climbing period is expected to range from 3 to 6 months. The future will focus on large-scale display business. The estimated production capacity is about 10,000 BP/CP tablets per month, and COF is about 3 million units per month.

At the end of 2023, the company's owners' equity attributable to the parent company was 5.829 billion yuan, up 80.83% year on year. The company's net assets per share belonging to the owner of the parent company were 4.90 yuan, an increase of 50.31% year on year. This was mainly due to the increase in the corresponding undistributed profit due to the availability of capital raised by the company's initial public offering in 2023 and the net profit generated from operations.

The DDIC market recovered moderately, and there may be a shortage of OLED DDIC for mainland mobile phones in the second half of the year. According to Qunzhi Consulting, the overall global supply and demand for display driver chips is basically balanced in 2024, and there is a risk of a shortage of OLED DDIC for smartphones in mainland China in the second half of 2024. Demand in the global display driver chip market is slowly recovering. Among them, demand for TV/laptop/smartphone display driver chips is expected to increase by 5.3%/8.6%/2.7% year-on-year respectively in 2024. Demand for displays/tablets also showed year-on-year growth in 2024, but the increase was relatively small, at 1.1% and 1.0%, respectively. Global display driver chip shipments are expected to be around 7.63 billion in 2024, an increase of about 4.0% over the previous year. The upstream industry chain shows that the inventory removal situation of driving design companies is good. As of 2023Q3, the inventory removal cycle has basically come to an end. All Fabless inventory levels have reached a relatively normal level, and the inventory levels of some Fabless, such as Lianyong and Ruiding, have dropped to less than 2 months. The industry's major Fabless inventories are expected to return to healthy levels by the second quarter of 2024. In terms of price, the HD TDDI price in mobile phone LCD TDDI is now close to the cost line. There is little room for subsequent price cuts. There is less room for price fluctuation in 2024, and it will basically stabilize at around 1 US dollar. FHD TDDI saw a sharp drop in IC prices in 2023 due to a drop in the 55HV foundry price. It is expected that the decline will narrow in 2024 and stop falling around 24Q3. In terms of mobile phone OLED driver ICs, prices may fall due to fierce market competition. At the same time, due to tight supply of OLED DDIC in mainland China and short-term price increases, OLED DDIC market prices may stop falling early or even rise slightly. In terms of large and medium-sized driver ICs, the price trend remained flat or declined slightly in the first half of 2024. The second half of 2024 was released with the Olympic Games and Windows 12, which is expected to drive a recovery in TV/IT demand, and the possibility of stabilizing IC prices is high. Fluctuations in the price of display chips will have an impact on the sealed price, but they are not completely transferred. The overall chip encapsulation price still needs to be determined according to the actual supply and demand situation in the market. Judging from the industrial transfer trend and the production expansion progress of related companies, the mainland's DDIC sealed testing supply pattern is relatively dominant. The company expects prices to remain relatively stable in 2024.

OLED has broad prospects, and the company's OLED business continues to grow. Driven by the continuous release of production capacity from domestic manufacturers and the continuous decline in flexible AMOLED panels, demand for AMOLED smartphone panels has increased markedly. According to CINNO Research data, the global market shipped about 690 million AMOLED smartphone panels in 2023, +16.1% year over year, of which shipments in the fourth quarter were +30.9% year over year and +35.1% month over month. Among them, flexible AMOLED smartphone panels accounted for 77.8%, +9.2 pcts year over year. According to Jibang Consulting data, the penetration rate of OLED in the smartphone market is expected to exceed 50%. The company's AMOLED accounted for about 18% of revenue from January to September 2023, and 2023Q3 already accounted for more than 20% of revenue in a single quarter, showing a gradual upward trend. Looking ahead to 2024, it is expected that the AMOLED penetration rate will increase further in the future as mid-range and low-end brand terminal products such as mobile phones and tablets will use AMOLED displays one after another, and domestic panel manufacturers continue to invest in AMOLED production lines.

Actively lay out non-display testing to build a second growth curve. Since 2015, the company has been making every effort to develop advanced non-display packaging technology, including copper-nickel-gold bumps, copper-nickel-gold bumps, and tin bumps. In 2019, the company successfully established a backstage DPS packaging facility, and attached great importance to the non-display chip packaging and testing business as a key area for optimizing product structure, increasing profits and strategic development. The company continues to cultivate various metal bump technologies for 12-inch wafers, and is expected to complete the construction of the full 12-inch Cu Pillar process in 2023. In addition, the company is also actively developing bump manufacturing and sealing services based on second-generation and third-generation semiconductor materials such as gallium arsenide, gallium nitride, and lithium tantalate to enhance product production capacity and economies of scale while reducing production costs, thereby increasing profitability. Benefiting from the growth of the RF front-end chip packaging and testing business, the company's non-display business increased dramatically in Q3 2023, accounting for 9% of revenue. The company is also simultaneously continuing research on AR/VR silicon-based display screen packaging and testing technology.

Investment advice

We expect the company to achieve revenue of 1,629/19.80/2,382 billion yuan in 2023-2025, and achieve net profit of 370.5/5.00/593 million yuan, corresponding to the share price PE on February 20, 2024, which is 33/25/21 times, respectively, to maintain a “buy” rating.

Risk warning

Downstream demand falls short of expectations; industrial transfer progress falls short of expectations; R&D progress falls short of expectations; customer expansion falls short of expectations; market competition intensifies.