Key points of investment:
2023 Annual Report: Operating income of 135 million yuan, -74.96% year on year; net profit to mother - 0.69 million yuan, -143.70% year on year; non-net profit withheld from mother - 0.7 billion yuan, -146.00% year on year; semiconductor business gross profit margin -0.84%, mainly due to a combination of factors such as a relative decrease in revenue from large-diameter silicon material products and relatively high cost of silicon wafer products.
Expanding production strengthens the position of semiconductor etched silicon materials industry. The main products of Shengong Co., Ltd. are monocrystalline silicon materials used for etching the upper and lower electrodes and jacket rings of equipment. According to the company's annual report, the market size of this material is about 4-5 billion US dollars, and the silicon electrode market is about 10-15 billion US dollars. The core team of Shengong has more than 20 years of overseas experience. The company's technologies such as non-magnetic field large-diameter monocrystalline silicon manufacturing technology, solid-liquid coexistence interface control technology, and thermal field size optimization process are at the international advanced level. The company's core product quality indicators have reached the international advanced level, which can meet the process requirements for silicon materials in advanced chip etching processes at 7nm and below. In January 2023, the production capacity of silicon materials was about 500 tons/year; in 2023, an increase of 300 million yuan was raised to expand production of silicon materials, which will create an additional production capacity of 393 tons (equivalent to 1,145,710 mm) of silicon materials for etching per year.
In the silicon parts sector, we are speeding up the localization of supporting 12-inch etching machines. In 2021, the company established two component factories in Jinzhou, Quanzhou, and has supporting capabilities for the entire industry chain from etching silicon materials to silicon electrodes; in 2022, it developed high-precision equipment for chemical mechanical polishing (CMP), and polycrystalline silicon structural products above 22 inches have been evaluated by a customer and achieved stable supply; the 2023 annual report shows that Shengong contacted several 12-inch integrated circuit manufacturers, and dozens of materials have obtained evaluation and certification results.
Semiconductor silicon wafers achieved revenue of 8.26 million yuan. The IPO fundraising project of Shengong Co., Ltd. added 1.8 million 8-inch semiconductor polishing sheets and 360,000 semiconductor companion films per year. Production capacity of 50,000 wafers/month has been built in 2022, and equipment of 100,000 wafers/month ordered in the second phase has entered the market one after another; starting in 2022, 8-inch test silicon wafers will be officially supplied to Japanese customers, and lightweight, low-defect ultra-flat silicon wafers have obtained certification and batch orders in mainstream domestic client evaluations.
The share of domestic revenue increased to 59%. Since global manufacturers of etching machines and manufacturers of silicon electrodes for etching are located in Japan, South Korea, and the United States, Shengong's main customers include international companies such as Mitsubishi Materials, SK Chemical, CoorsTek, and Hana. The share of domestic revenue increased from 1.9% in 2019 to 59% in 2023.
Adjust profit forecasts to maintain a “buy” rating. Net profit attributable to mother in 2023 was -0.69 million yuan, lower than Shenwan's forecast value of -15 million yuan, mainly due to silicon wafer shutdown losses of 387.889 million yuan in 2023. Due to the recovery of the company's silicon materials sector after about half a year of the semiconductor cycle and the smooth expansion of the company's new business, the 2024/25 net profit forecast was adjusted from 11/20 million yuan to 11/260 million yuan, and the 2026 profit forecast was increased by 420 million yuan. Shengong Co., Ltd.'s 2024PE30X is 44X lower than the average 2024PE in the semiconductor materials sector, with room for growth of 47%, maintaining a “buy” rating.
Risk warning: The semiconductor boom cycle is declining, the yield of new products has fallen short of expectations, and shareholders' holdings have reduced their holdings, causing changes in stock prices.