Matters:

The company released its 2023 annual report. In 2023, it achieved revenue of 1,703 billion yuan, yoy +7.72%; realized net profit of 211 million yuan, yoy +13.26%; and deducted non-net profit of 126 million yuan, yoy +0.23% in 2023. 2023 profit distribution plan: cash dividend of 0.35 yuan (tax included) for every 10 shares.

Ping An's point of view:

The high sales volume of precursor materials has led to positive growth in the company's performance. In 2023, the company's sales volume of precursor materials (including MO source) reached 208.92 tons, yoy +62.22%. The business revenue reached 340 million yuan, yoy +17.86%, accounting for 19.93% of total revenue. The gross sales margin was 39.9%, a year-on-year decrease of 3.76 percentage points. During the annual report period, two of the world's first advanced silicon precursor patents purchased by the company from DuPont achieved mass production. Advanced semiconductor precursor sales exceeded 100 million for the first time, becoming the main source of the company's performance increase in 2023. In 2023, the company's special gas sales volume was 9403.98 tons, yoy +1.34%, revenue reached 1,231 billion yuan, yoy +3.04%, accounting for 72.30% of total revenue, and gross sales margin was 46.13%, down 2.75 percentage points year on year. In the specialty gas business, relying on the technical advantages of phosphane, the key product, phosphane mixtures were introduced into the photovoltaic market using the first gas-mixed torpedo truck supply model in China, driving the rapid growth of hydrogen specialty gas. During the annual reporting period, sales in the hydrogen specialty gas sector (phosphane/arsenic) increased by more than 40% year-on-year.

The volume of high-purity specialty gas continues to increase, and various photoresist and precursor products will enter mass production and sales. 1) The subsidiary Ulanqabunan Microelectronics plans to add 7,200 tons/year nitrogen trifluoride and 500 tons/year tungsten hexafluoride to continue to advance. The entire project is expected to be completed by the end of 2024. At the same time, the Zibo base promoted successful trial production of the new product hexafluorobutadiene. 2) The high-purity phosphane, arsenic expansion and arsenic technology improvement project with an annual output of 140 tons and an annual output of 45 tons of precursor industrialization for advanced semiconductor processes have been completed and are in the intended state of use. 3) Low-silicon, low-oxygen trimethylaluminum, a key product of third-generation semiconductors, has gradually achieved stable mass production, and trimethylindium and triethylgallium have entered verification tests for IGZO applications by leading overseas customers. 4) The holding subsidiary Ningbo Nanda Optoelectronics can achieve full autonomy from photoresist raw materials to finished products and supporting materials, and plans to form a 25 tons/year ArF photoresist production line. Currently, the three ArF photoresists developed have been certified and sold by customers, and various products are being certified by major customers.

Acquire shares in important companies and enter more high-end materials. During the annual report period, the company acquired 63.87% of Ogenik Materials (Suzhou), mainly engaged in the development and industrialization of OLED materials; acquired the remaining 27.17% shares of NTU Optoelectronics (Zibo), making it a wholly-owned subsidiary, which mainly operates in the specialty gas business.

Actively implement equity incentives for subsidiaries and gather core talents. During the annual report period, Nanda Semiconductor Company, the company's advanced precursor project entity, completed a capital increase and share expansion. A total of 103 employees on the three employee shareholding platforms actively subscribed for additional shares, investing a total of 45.65 million yuan and holding 13.51% of the shares. At the same time, the company's first doctoral laboratory startup was successfully incubated, and Ogenik Materials (Suzhou) Co., Ltd. was formally established in May 2023. The core team subscribed for 11.2 million shares and held 36.13% of the shares.

Investment proposal: The company's large-scale fluorine-containing specialty gas projects such as nitrogen trifluoride in Ulanqab will continue to advance, and the scale of the special gas business will be further expanded; various photoresists and advanced precursor products are expected to be mass-produced and sold, which will become the core source of incremental performance. Meanwhile, in the terminal semiconductor and panel industry, inventory removal is improving, demand is picking up, prices for some products are picking up, and demand for materials such as electronic specialty gases and precursors is expected to rise. However, in line with the company's 2023 performance, considering the reduction in the price and gross margin level of specialty gas and precursor products, the 2024-2025 net profit was adjusted to 2.63 and 351 million yuan (the original value was 326 million yuan and 410 million yuan), increasing the net profit to the mother in 2026 to 421 million yuan, corresponding to the closing price of PE on April 9, 2024 to 52.6, 39.4, and 32.9 times. In 2024-2026, as the company's various projects continued to advance, various high-end high-barrier semiconductor materials were mass-produced Sales, the company's performance is expected to grow and maintain a “recommended” rating.

Risk warning: 1) The growth rate of terminal demand falls short of expectations. If the fundamentals of the semiconductor and other terminal industries fall short of expectations and demand is difficult to recover, the growth rate of the company's electronic chemicals business may be limited. 2) The risk of increased market competition and a sharp decline in product prices. If comparable companies achieve technological breakthroughs and drastically increase the scale of production capacity, it may cause the risk of overcapacity for some products and increased market competition, which in turn will lead to a decline in the prices of related products, and gross profit will be drastically reduced. 3) Risk of technological breakthroughs and blocked customer certification. If the company's core high-barrier product technology is difficult to break through, or if it is difficult to advance certification for downstream clients, the project process may be delayed, and the original plan may be difficult to achieve.