The company released its 2023 annual report. In 2023, the company achieved revenue of 6.184 billion yuan, +73.19% year over year; net profit to mother of 1,461 billion yuan, +85.28% year over year; net profit after deducting non-return to mother of 1,435 billion yuan, +91.32% year over year. In 2023, Q4 achieved revenue of 1,973 billion yuan, +42.97% year-on-year, net profit to mother of 288 million yuan, -19.99% year-on-year, and net profit of 295 million yuan after deducting non-attributable net profit of 295 million yuan, or -11.68% year-on-year. The gross margin for the fourth quarter of 2023 was 35.0% (-9.2pct year-on-year, -9.8pct), and the net margin was 14.6% (-11.5pct yoy, -12.5pct month-on-month). The company's profit declined in the fourth quarter and profitability was under pressure. We believe that the main reason was phased overcapacity in the photovoltaic industry and declining prices in the industrial chain, which led to insufficient operating rate in the silicon wafer industry and pressure on industry profits. Looking to the future, in the context of clear production capacity in the industry, companies with strong alpha capabilities will be the first to rebound and gain a larger share, and profits will rise at the same time.

Photovoltaic cutting equipment: leading technical strength, stable leading position. In 2023, the company's photovoltaic cutting equipment achieved revenue of 2,877 billion yuan, an increase of 95.16% year on year, gross margin of 32.19%, or -1.01 pct year on year. As of December 31, 2023, the total amount of orders in hand for the company's photovoltaic cutting equipment products was 2,260 billion yuan (tax included), an increase of 53.32% over the previous year. Relying on R&D and innovation, the company rapidly updates and iterates on various equipment products. It continues to be recognized by customers for its leading technical advantages. Its competitiveness continues to improve. The leading effect is remarkable. Multiple products work together, and the market share is stable.

Photovoltaic cutting consumables: Even under pressure from the industry, gross margin has increased dramatically, demonstrating strong technical strength. In 2023, the company achieved revenue of 1,162 billion yuan for photovoltaic cutting consumables, a year-on-year increase of 38.36%, and gross margin of 58.55%, +15.45pct year-on-year. In 2023, the company's annual production of King Kong wire was about 56 million kilometers, an increase of 65.57% year on year. Annual sales volume (excluding personal use) was about 38 million kilometers, an increase of 51.08% year on year, and the market share increased steadily. In terms of thinning, the company has achieved mass sales of 36 μm, 34 μm and 32 μm linear high-carbon steel wire diamond wire, and achieved batch testing of 30 μm linear types. The company's “Huguan (Phase I) Project with an annual output of 40 million kilometers” is under construction. Production capacity is expected to be released in the first half of 2024. The new production line will use 16 lines per machine and 20 lines per machine. At the end of 2023, the company's production capacity of King Kong wire reached 60 million kilometers, and the company's annual target shipment scale of King Kong wire reached more than 100 million kilometers in 2024. In addition, the company will accelerate the development and expansion of tungsten diamond wire. It is estimated that tungsten diamond wire shipments will account for more than 20% of total shipments in 2024.

Silicon wafer cutting and processing service: 38 GW of production capacity has been implemented, and the planned production capacity is 102 GW. In 2023, the company's silicon wafer cutting and processing service business achieved revenue of 1,719 billion yuan, a year-on-year increase of 84.99%, and a gross margin of 43.01%, or 2.44pct year-on-year. The core logic of photovoltaic silicon wafer cutting and processing services is “specialized division of labor+customer asset light & customer risk transfer”, which is expected to develop into a mainstream trend in the market. The company has core competitiveness such as “equipment+consumables+process”, and has industry-leading technical advantages in large size, thinning, etc. In 2023, the production capacity of the company's silicon wafer cutting and processing services reached 38 GW, and effective shipments were about 25.5 GW throughout the year. On the customer side, the company has established long-term cooperative relationships with photovoltaic companies such as Tongwei Co., Ltd., Beijing Express, Shuangliang Energy, Meike Co., Ltd., Yingfa Ruineng, Sunshine Energy, Huayao Optoelectronics, and Runyang Solar. In January 2024, the first batch of the “Yibin (Phase I) 25GW PV Large Silicon Wafer Project” was put into operation and is expected to be completed in June 2024. In 2024, the company aims to ship 50GW for the whole year.

Innovative business: The silicon carbide cutting scene penetrated rapidly, and orders grew steadily. The company's innovative business achieved revenue of 255 million yuan, a year-on-year increase of 60.71%, and gross margin of 56.63%, +2.22pct year-on-year. As of December 31, 2023, the total amount of in-hand orders for the company's innovative business equipment products was 100 million yuan (tax included), an increase of 36.99% over the previous year. The silicon carbide diamond wire slicer launched by the company has formed batch orders, covering the vast majority of the industry's new diamond wire slicing production capacity. Among them, the 8-inch silicon carbide diamond wire slicer has been verified, approved, and orders have been formed by leading customers in the industry. The company expects to promote a 12-inch silicon semiconductor chip cutter to the market within 2024.

Investment advice: Based on the current phased and structural overcapacity in the photovoltaic industry, fluctuating industrial chain prices and operating rate compression, we expect the industry to clear production capacity in 2024, and the high test has a strong alpha, which is expected to gain a larger share after production capacity is cleared, and profits are also expected to bottom up. Therefore, we expect the company to achieve net profit of 9.7, 12.5, 1.53 billion yuan, corresponding to PE of 11, 9, and 7X. The company is a leader in the field of photovoltaic cutting. Diamond wire and chip foundry plans to double its production capacity and maintain a “buy” rating.

Risk warning: The expansion of silicon wafer production fell short of expectations, the price of silicon wafers fell, and the company's production capacity expansion fell short of expectations.