Key points of investment:

Incident: The company released its 2023 annual report, which fell slightly short of expectations. In 2023, the company's revenue was 458 million, up 4.4% year on year; net profit to mother was 47 million, down 20.8% year on year; net profit after deducting non-return to mother was 0.3 million, down 37.7% year on year; gross profit margin was 51.89%, up 2.37 pcts year on year. Among them, 4Q23 revenue was 98 million yuan, down 2.7% year on year; net profit to mother was 10 million yuan, up 60.2% year on year.

Revenue in the semiconductor sector increased by nearly 60%, accounting for nearly 40% of revenue. In 2023, the company's revenue in the semiconductor sector was 170 million yuan, an increase of 57.7% over the previous year; accounting for 37.05% of revenue. According to the company's prospectus, the company's main products in the semiconductor field are semiconductor inspection and measurement equipment and core optical devices for lithography machines. Major customers include Camtek (Camtek), Shanghai Microelectronics, etc. Kangte Technology's revenue for the first three quarters of 2023 fell 5% year on year, and the company still bucked the trend and achieved high growth.

A number of R&D projects in the semiconductor field have entered the industrialization stage to help replace domestic semiconductor equipment with domestic production. By the end of 2023, in the company's research projects, large-aperture crystal morphology interferometry technology (applied to front-end morphology detection), lithography system optical device processing and coating technology (applied to lithography machine lighting, exposure and other systems) have all entered the industrial promotion stage. Wafer surface defect detection technology (applied to graphic inspection) has entered the small-batch trial production stage, and R&D in the semiconductor field is progressing rapidly. In 2023, the company obtained 20 new invention patents, accounting for 45% of the total number of invention patents. In 2023, the company's domestic revenue was 143 million yuan, a year-on-year increase of 58.7%. Domestic demand for semiconductor equipment is hot, and the company is actively expanding the domestic market to help replace domestic products. It is expected to become the main driver of the company's performance growth in the future.

The reason for the decline in net profit: The decline in overseas AR/VR testing and other revenue was dragged down, and the introduction of high-end talents led to an increase in management and R&D expenses. According to the company's prospectus, the company's customers in the AR/VR testing field are mainly Meta and Microsoft. Considering that the pace of iteration of the two AR/VR products slowed down in 2023, which dragged down the company's revenue in the AR/VR testing field, the revenue share fell to 8.4%. On the cost side, in 2023, the company increased its investment in human resources. Management expenses and R&D expenses increased by 23.7% and 23.4% respectively, and the cost ratios reached 21.0% and 14.7% respectively, increasing 3.3 and 2.3 pcts respectively over the previous year, causing the company's net profit margin to drop 3.25 pcts to 10.2% when the gross margin increased by 2.37 pcts.

Investment analysis opinion: Lower profit forecasts and maintain the “gain” rating. Considering that the company's net profit due in 2023 was lower than expected, and the growth rate in the life sciences and AR/VR testing fields was relatively low, the company's 2024-2025 profit forecast was lowered and the 2026 profit forecast was added. The company's revenue from 2024 to 2026 is estimated to be 5.5, 650, and 740 million (originally forecast to 2024 to 2025), with year-on-year growth rates of 19.4%, 18.8%, and 13.7%; the company's net profit for 2024 to 2026 is estimated to be 0.61, 0.75, and 91 million, respectively (originally forecast 1.11 and 144 million from 2024 to 2025), with year-on-year growth rates of 30.3%, 23.7%, and 20.3%, respectively. The corresponding dynamic price-earnings ratios are 97, 78, and 13.7%, respectively 65 times. Considering that after the company's pullback, the current static PE is in the 1.56% fraction since listing. At the same time, as an important component supplier for domestic lithography machines, the company is expected to benefit greatly if domestic lithography machines break through, and maintain the “gain” rating.

Risk warning: trade frictions and changes in trade-related policies, downstream market expansion falling short of expectations, etc.