Key points of investment

New product development showed results, and the performance continued to grow steadily: in 2023, the company achieved operating income of 3.89 billion yuan, up 35.3% year on year, of which semiconductor cleaning equipment was 2.61 billion yuan, up 25.8% year on year, accounting for 67%; other semiconductor equipment (electroplating, vertical furnace tubes, stress-free copper casting, etc.) was 940 million yuan, up 81.6% year on year, accounting for 24%. Advanced packaging wet processing equipment was 160 million yuan, accounting for 4%; net profit to mother was 9.1 billion yuan, up 36.2% year on year, net profit after deducting 8.7 percent year on year 100 million yuan, a year-on-year increase of 25.8%. 2023Q4 achieved revenue of 1.14 billion yuan in a single quarter, up 27.2% year on year, and net profit to mother of 240 million yuan, up 4.5% year on year.

Product structure optimization & scale effect, profitability improvement: In 2023, the company's gross margin was 52%, +3pct year on year. By product, semiconductor cleaning equipment's gross margin was 48.6%, +0.3 pct year on year, other semiconductor equipment (electroplating, vertical furnace tubes, stress-free copper blasting, etc.) was 59.5%, +7.4 pct year on year, advanced packaging wet process equipment was 42.1%, +10.5 pct year on year; the cost rate for the period was 28.7%, +5.6 pct year on year, with sales expenses ratio of 8.4% and -0.6 pct year on year. The management expense ratio (including R&D) was 21.0%, +4.1pct year on year, and the financial expense ratio was -0.7%, +2.1pct year on year; the net sales margin was 23.4%, +0.1 pct year on year.

There are plenty of on-hand orders and high inventory growth: As of the end of 2023, the company's inventory was 3.93 billion yuan, +46% year over year, and contract liabilities were 8.8 billion yuan, +7% year over year. According to the company's voluntary disclosure notice, up total orders of 6.796 billion yuan as of September 27, 2023, an increase of 46.3% over the end of Q3. The increase mainly comes from batch orders from leading domestic companies. The company's on-hand orders cover various fields of logic, storage, and compound semiconductors, among which logic accounts for a relatively large portion. Advanced packaging currently has Orders from leading domestic companies.

Continue to expand product categories such as PECVD and Track: The company is actively improving the industrial layout while stabilizing its leading position in cleaning equipment in China. (1) PECVD: Shengmei's products can meet the comprehensive process needs of customers. Mid-end and high-end process applications are the company's goals, including both logic and storage. (2) Track: Good progress has been made. The company expects to connect to the lithography machine by the end of '23. The biggest feature of the equipment is that it uses advanced structural design and has the characteristics of high speed and high output.

Profit forecast and investment rating: Considering the continuous growth of the company's main business and continuous expansion of product categories, we basically maintain the 2024-2025 net profit forecast of 12.4/1.55 billion yuan. We expect net profit to mother of 1.87 billion yuan in 2026, corresponding to dynamic PE of 30/25/20 times, respectively, to maintain an “increase” rating.

Risk warning: Downstream capital expenditure falls short of expectations, new product development falls short of expectations, etc.