Core views:

The company is a leading semiconductor material platform enterprise in China. The company's products mainly include precursor materials & SOD, silicon powder, electronic special gas, photoresist, LDS, etc. Among them, the precursors are leading domestic suppliers, and the downstream are mainly storage companies. Driven by rapid localization and the promotion of advanced manufacturing processes in the industry, the business is booming. At the same time, with the global storage cycle bottoming out and AI's demand for advanced memory chips, the company's precursors are expected to be rapidly deployed. In terms of LNG sheets, due to geopolitical and other factors, demand for LNG sheets has exploded, and the company is full of orders.

occurrences

According to TrendForce, Samsung drastically cut production in the fourth quarter of last year. After inventory pressure improved, production began to pick up in the first quarter of this year, and the operating rate was about 80%. During the peak season in the second half of the year, demand is expected to increase significantly compared to the first half of the year, and production capacity will continue to rise until the fourth quarter. SK Hynix, on the other hand, is actively expanding HBM production capacity, and the production volume is slowly increasing. With the mass production of HBM3e, related advanced production processes also continued to rise.

According to Global Semiconductor Watch, Micron announced on February 26 that it has begun mass production of HBM3E solutions. Samsung has begun providing customers with samples of the HBM3E 12H, and mass production is expected to begin in the second half of this year. SK Hynix also plans to launch the HBM3E into mass production in the first half of 2024.

According to Global Semiconductor Watch, SK Hynix (SKHynix) will invest more than $1 billion in South Korea this year to expand and improve the final step of its chip manufacturing, which is advanced packaging. SK Hynix said in a recent financial report that it plans to increase capital expenditure in 2024 and focus production on high-end storage products such as HBM. HBM's production capacity will more than double compared to last year.

Brief review

Leading supplier of precursors, expected to benefit from HBM's expansion of production

The storage market mainly provides HBM products from three original manufacturers: Samsung, SK Hynix, and Micron. In 2022, SK Hynix accounted for 50% of the HBM market, Samsung for 40%, and Micron for 10%. The company's semiconductor precursor materials are the core materials used in semiconductor materials for thin film deposition processes. They are mainly used in semiconductor integrated circuit storage and logic chip manufacturing. The company is one of the world's leading precursor suppliers. The products in DRAM can meet the world's most advanced memory chip manufacturing process 1b, 200X layer or higher, and mass production supply of 3nm logic chips, and is the core supplier of Hynix. As AI drives demand for advanced memory chips and manufacturers such as Hynix and Samsung continue to expand production, the company's precursor business is expected to expand rapidly.

The localization of semiconductors is progressing rapidly, and the LNG sheet business is booming

The company's mature precursor products fully meet the customer needs of all domestic technology nodes. Mainstream products have entered the domestic release stage, and the Jiangsu Xianke Yixing production base has localized supply capacity this year. In the photoresist business, the company supplies products in batches to well-known panel suppliers such as Samsung Electronics, LGDisplay, BOE, Huaxing Optoelectronics, and Huike. Self-developed low-temperature RGB photoresists for OLEDs and CNT antistatic materials have been officially mass-produced. High-end products such as RGB photoresists for CMOS sensors and I-Line photoresists for advanced packaging RDL layers are being tested and introduced. Research and development of semiconductor process photoresists and SOC materials is progressing according to plan, and some products have entered the testing and introduction stage. In the electronic specialty gas business, the company supplies products such as carbon tetrafluoride in batches to companies such as Samsung Electronics, TSMC, Intel, SMIC, Hynix and BOE. At the same time, with the development of domestic UHV power transmission and transformation projects, the sales volume of the company's industrial sulfur hexafluoride products has increased. In terms of silicon powder business, Huafei Electronics, on the one hand, maintains good business partnerships with existing customers of Sumitomo Bakelite, Hitachi Chemical, and German Henkel, while actively developing markets. The business of high-value-added products is progressing well, and some products have already been sold in batches.

In terms of the LNG sheet business, 2022 was affected by factors such as the Russian-Ukrainian war and rising crude oil prices. European natural gas turbulence, increased imports to the US, and the surge in liquefied natural gas trade contributed to the explosive growth of the LNG storage and transportation equipment manufacturing industry. The company signed sales contracts and conditional entry into force contracts for more than 80 LNG carriers and dual-fuel container ships with shipbuilding companies such as Hudong Zhonghua Shipbuilding (Group) Co., Ltd., Jiangnan Shipbuilding Co., Ltd., and Dalian Shipbuilding. At the same time, the company and its holding subsidiary won the bid for the procurement and construction of 6 220,000 square meters of natural gas storage tanks for the Beijing Gas Tianjin Nangang LNG emergency reserve project. The company is currently the only supplier of LNG insulation sheets certified by GTT and the Classification Society in China. It has independent and controlled production technology that breaks through the neck, advanced production technology and highly intelligent production lines, and has carried out in-depth cooperation with domestic and foreign customers. The company has sufficient on-hand orders, and its long-term profitability continues to increase. In 2022, the basic construction of the company's LNG storage project to localize reinforced insulation composites was completed, the RSB and FSB secondary shielding material research and development of the stuck neck project made breakthrough progress, and an intelligent production line was built to enter the product certification stage. While completing and delivering early orders one after another, the company maintains close and friendly communication with downstream shipowners and onshore storage ****ufacturers to lay the foundation for subsequent plate sales and construction projects.

There are plenty of projects under construction, and the semiconductor materials business continues to strengthen

As of the end of the third quarter of 2023, the company's projects under construction amounted to 1,804 billion yuan. In terms of the semiconductor business, the precursor business currently has a production capacity of 450 tons/year, with a production capacity of 4-500 tons/year. Currently, 90% of the infrastructure has been completed, and the main production and R&D equipment has reached 60%-70%; Huafei Electronics' next-generation large-scale integrated circuit packaging special material localization project (with an annual output of 10,000 tons of spherical and fused electronic packaging substrates) has been put into operation. It is expected that construction will be completed one after another in March 2023, and a cooperation agreement has been signed with the Huzhou South Taihu New Area Management Committee. Jacques Feihua passed a plan to introduce the most advanced international Of The production line and production process have formed a semiconductor core material project with an annual output of 39,000 tons; the next-generation electronic information materials localization project - photoresist and photoresist supporting reagent projects are progressing in an orderly manner, with production capacity of 9840 tons each for regular glue and color glue. After completion, the above projects will further strengthen the competitiveness of the company's semiconductor materials business, guarantee product supply, enhance competitiveness, and inject continuous impetus into performance growth. In terms of LNG sheets, in order to meet the large-scale release of new domestic LNG carriers, construction of the company's second plant continues to advance. It is expected to be put into operation by the end of 2023, reaching the production capacity of 30 ships.

Profit forecast and valuation: The company's net profit for 2023-2025 is estimated to be 616 million yuan, 960 million yuan, and 1,217 million yuan respectively. PE is 43.3X, 27.8X, and 21.9X, respectively, maintaining a “buy” rating.

Risk warning: industry competition risk (domestic and foreign competitors expand market share through continuous industry integration, etc., the company's market position may be challenged, and the company may face fierce market competition); risk of exchange rate fluctuations (the company's products account for a large share of exports, and fluctuations in the RMB exchange rate have a large impact on the company's earnings to a certain extent); risk that capacity construction progress falls short of expectations (if the company's planned production capacity cannot reach production as scheduled, it will affect product production and sales, which in turn affects performance); industrial policy risks (the company's downstream customers mainly include integrated circuits, (In fields such as display panels, domestic and foreign policy adjustments may affect some of the company's downstream industries).