Leading gas sensor companies, the consolidation and expansion of the “1+4" strategy go hand in hand. Sifang Optoelectronics Co., Ltd. is a science and technology innovation board listed company engaged in smart gas sensors and high-end gas analysis instruments. It was founded in Optics Valley, Wuhan in 2003. It has accumulated gas sensing technology including principles of optics, ultrasonic waves, MEMS metal oxide semiconductors (MOX), electrochemistry, ceramic thick film processes, high temperature solid electrolytes, etc., and has more than 140 domestic and foreign patents. The products are widely used in air quality, environmental monitoring, industrial processes, safety monitoring, health care, smart measurement, etc. The company's performance trend is good, and revenue is growing steadily. In the first three quarters of 2023, the company achieved revenue of 452 million yuan, an increase of 13.8% over the previous year. Product restructuring continues. The company adheres to a high-margin strategy and lays out high-margin products. The company's gross margin for the first three quarters of 2023 was 44.7%, an increase of 1.02pct over the same period last year. The company focuses on the two major industrial ecosystems of gas sensors and gas analyzers. The product structure is diverse, application scenarios are rich, and the downstream covers a wide range of fields such as home appliances, automobiles, and medical care. Relying on the advantages of technology platforms and product portfolios, major customers and internationalization strategies help customers develop. The company's current shareholding structure is concentrated and stable. The implementation of equity incentives in 2023 shows confidence in growth. Currently, fund-raising projects are progressing in an orderly manner, and the existing business is expected to expand and deepen.

In the field of air quality: The recovery of household appliances has led to a recovery in demand, and the rich potential of downstream application scenarios has been unleashed.

With rapid social and economic development and continuous improvement in living standards, people place higher demands on indoor, car cockpit, and outdoor air quality. The company's air quality products mainly include infrared CO2 gas sensors, dust sensors, and electrochemical formaldehyde sensors. These products are based on the company's core technologies, thermopile infrared gas sensing technology, dust sensing technology, and electrochemical formaldehyde sensing technology.

The company has a wide range of products in the field of air quality. It provides products such as fresh air controllers, CO2 transmitters, air quality detectors, etc., and is applied to intelligent fresh air systems, air purifiers, vacuum cleaners/floor scrubbers, range hoods, wall-mounted stoves, air conditioners, etc. The company's air quality product revenue grew rapidly from 2017 to 2021, and revenue was pressured by the downturn in real estate. We believe that in the future, as the real estate market stabilizes, the superposition company will continue to expand downstream application scenarios and raise the competitive threshold in the industry. The sector achieved a recovery in sales.

Automotive field: Demand for gas sensors has increased, and there is a large space for thermal uncontrolled sensors. The car cockpit is a space for direct contact with the driver. The vehicle interior environment has become an important factor affecting the riding experience. Equipped with a car comfort system has become an area where car companies seek a key layout for differentiated and branded development. Benefiting from the introduction and implementation of national standards, the energy storage battery thermal loss sensor business will also usher in new growth demand. At present, the number of the company's vehicle sensor projects has reached more than 24 million, and order conversion is expected to bring about steady and reliable performance growth. In 2022, the company's designated vehicle sensor projects gradually entered the mass production period in that year, and the sales revenue of the vehicle sensor business increased 118.38% year-on-year in that year.

Medical sector: Policies drive market demand expansion, product line improvement and continuous market expansion. Healthcare reform and increased awareness of pulmonary function are expected to gradually increase demand in the medical gas sensor market. At present, the company's product line is relatively complete, and the sales revenue of healthcare gas sensors remains stable. In the first three quarters of 2023, due to factors such as “COVID-19” Eryang and increased consumption of healthcare products, the sales revenue of the healthcare sensor business, which mainly focuses on ultrasonic oxygen sensors, increased 178.06% year on year.

Environmental monitoring and industrial processes: Environmental policies bring incremental market demand, and technological leadership seizes alternative opportunities for localization. Air pollution control continues to increase, and strict standards are driving incremental market demand for gas analyzers. At the same time, demand for localized high-end online testing instruments in industrial processes continues to increase. The company started early in gas analyzer technology, has rich experience in technology accumulation and product development, has high market recognition, and has strong market competitiveness in market fields such as gas composition and calorific value analysis, and biogas engineering process analysis instruments. The company has made significant progress in the development of domestic high-end process gas analyzers, launched laser Raman spectral gas analyzers and laser ammonia escape analyzers, and launched gas analyzer system solutions for high-energy industries such as steel, metallurgy, petrochemicals, building materials, etc., which are expected to replace imported instruments in high-end industrial process instruments such as natural gas, petrochemicals, and large-scale coal chemicals in China.

Profit forecast and investment rating: As revenue continues to rise in the company's rapidly developing four business areas of smart metering, healthcare, safety monitoring and environmental monitoring, and the adverse factors in the air quality sensor business gradually subside, we expect the company's 2023-2025 EPS to be 2.02/3.30/5.21 yuan/share, respectively, and PE corresponding to the March 1 stock price will be 27.99/17.11/10.83 times, respectively. We believe that the company is deeply tied to major customers, and has obvious card advantages in some segments such as refrigerants, etc., and that abundant orders guarantee the company's future performance. Based on the company's future growth, we will give the company a certain valuation premium of 25 times in 2024 (high growth over the next two years can fully absorb this premium), corresponding to a target price of 82.5 yuan/share. The first coverage gives a “buy” rating.

Risk factors: Market risk: Increased competition among domestic and foreign companies has led to a decline in the company's competitive advantage and pressure on profit levels. Business risks: (1) Product line expansion in the field of automotive sensors falls short of expectations; (2) promotion of new technology research and development or transformation of results falls short of expectations; (3) sales expansion in domestic and overseas markets falls short of expectations.