Incidents:

On April 10, the company released its 2023 annual report. It achieved annual revenue of 2,667 billion yuan, a year-on-year decrease of 2.00%; realized net profit attributable to mother of 222 million yuan, a year-on-year decrease of 43.08%; and realized net profit withheld from non-mother of 164 million yuan, a year-on-year decrease of 52.79%.

Revenue grew quarterly throughout the year, and multiple factors weighed on profit margins:

The company's revenue in Q1-Q4 in 2023 increased quarterly, to 5.47/6.13/713/795 million yuan, respectively. Revenue for the fourth quarter increased 3.79% year on year and 11.42% month on month; net profit to mother was 46 million yuan, down 51.99% year on year, down 43.09% month on month. The month-on-month decline in profit in the single quarter was mainly due to the amount of asset impairment losses calculated in the fourth quarter. Among them, the annual revenue of the semiconductor materials sector was 857 million yuan, which was affected by the adjustment of the caliber of the printing consumables chip business. If the chip business was excluded, the business revenue of this sector was 669 million yuan, up 28% year on year; if the printing and copying consumables business was 1,786 billion yuan. If added back to the chip business, the segment's revenue was 1,973 billion yuan, down 7.9% year on year. The gross margin of both sectors declined year over year, mainly due to factors such as changes in product structure. Cost-side companies continue to increase R&D investment in new semiconductor innovative materials projects such as optoelectronic semiconductor photoresists. The annual R&D expenses amount was 380 million yuan, an increase of 20.20%; the R&D cost rate was 14.26%, an increase of 2.64 pcts over the previous year; the number of R&D personnel accounted for 30.74%, an increase of 6.87 pcts over the previous year.

At the same time, the construction of the Xiantao Industrial Park affected factors such as the increase in interest expenses on bank loans, exchange gains and losses, the year-on-year decline in long-term equity investment income of participating companies, the implementation of the Qijie Technology employee shareholding plan, and the intermediary expenses of the Beihai Jixun listing agency expenses, all of which had a certain impact on the net profit of the mother. Inventory volume at the end of the reporting period decreased by 60.37% year on year, net operating cash flow was $534 million, and inventory turnover and cash flow were good.

CMP polishing pads performed well in the fourth quarter, and CMP polishing liquid and cleaning liquid were quickly added:

(1) CMP polishing pad business: Achieved annual revenue of 418 million yuan, a year-on-year decrease of 8.65%; however, it achieved sales revenue of 149 million yuan in the fourth quarter, up 25.68% month-on-month and 49.21% year-on-year, setting a record high of revenue in a single quarter. Compared to the first half of the year, due to weak production capacity due to the policies of some downstream customers, sales declined, and the margins of the polishing pad business improved markedly. Among them, many polishing pad products at the Qianjiang factory have been sold in batches, the number of customers that have passed the test has increased, and production has entered the climbing stage. Including non-woven polishing pads, the grinding process has also been tested and orders have been obtained from many customers. The pilot test work for microspheres for self-made CMP polishing hard pads has been completed and industrial construction has begun. Subsequently, the three core raw materials of CMP polishing pads were gradually produced in-house, consolidating product competitiveness. (2) CMP polishing liquid and cleaning liquid business: Achieved annual revenue of 77 million yuan, up 330.84% year on year; achieved sales revenue of 28.9 million yuan in the fourth quarter, up 32.96% month-on-month and 294.61% year on year, entering a stage of rapid growth. Customer demand for polishing liquid products equipped with self-produced grinding particles continues to grow. Copper and barrier layer polishing solutions have begun to be verified in mainstream domestic customer production lines, and cerium oxide polishing solutions continue to be developed. In terms of cleaning solutions, in addition to copper CMP cleaning solutions, various other process cleaning solutions developed in 23 years have been developed and introduced, and sales revenue has been generated. As the scale of the semiconductor industry grows, the manufacturing process progresses, and the number of layers of chip stacks increases, the amount of polishing steps and CMP consumables will increase, and the CMP materials market will expand further. According to TECHCET's latest forecast, the global CMP consumables market is expected to reach $3.5 billion in 2024 and grow further to $4.2 billion by 2027. As a domestic supplier with a first-mover advantage, the company is expected to be the first to benefit.

Display materials help increase performance, and advanced packaging and wafer photoresists advance rapidly:

(1) Semiconductor display materials: Sales revenue in 2023 was 174 million yuan, up 267.82% year on year; sales revenue of 66.73 million yuan was achieved in the fourth quarter, up 17.46% month on month and 174.86% year on year. The degree of autonomy in the upstream core raw material supply chain of the OLED panel industry is low, and there is broad scope for domestic replacement. The company's YPI and PSPI products have become the number one supplier for some mainstream panel customers in China, and are in a leading position in domestic supply. The film packaging material TFE-INK has been certified by major downstream customers and obtained batch orders. (2) High-end wafer photoresist: The construction of the Qianjiang Phase I small-scale photoresist mass production line was basically completed, and the construction of the Qianjiang Phase II 300-ton photoresist mass production line also began in the second half of 2023. Currently, 16 domestic mainstream wafer photoresists have been deployed, including 8 high-end KrF photoresists and 8 submerged ArF photoresists (including 4 negative imaging immersion ArF photoresists). Customer samples for 7 products have been completed, including 1 extreme resolution KrF photoresist and 1 extreme resolution ArF photoresist. The rest of the products are scheduled to be delivered to customers in 2024. (3) Advanced semiconductor packaging materials: The industrial construction of temporary bonding adhesives has been completed, and the verification and mass production introduction work for mainstream domestic customers has basically been completed; the semiconductor packaging PI layout has 7 products, 5 samples have been sent, and the products fully cover non-photosensitive PI, positive PSPI and negative PSPI, and the company plans to complete the verification and introduction of some products in 24 years.

Investment advice:

We estimate that the company's revenue for 2024-2026 will be RMB 3.251 billion, RMB 3,983 million and RMB 4.724 billion, and net profit to mother will be RMB 411 million, RMB 606 million and RMB 902 million respectively, corresponding to EPS of RMB 0.43, RMB 0.64, and RMB 0.95, respectively. Taking into account the recovery of the semiconductor industry's boom, the company's leading domestic supply position as a platform-based semiconductor materials company and related business development has outstanding growth. Combined with the Wind industry's unanimous expectations, the company was given a 60 times PE valuation, corresponding to EPS of 0.43 yuan in 2024, and a target price of 25.80 yuan for 6 months to maintain a “buy-A” investment rating.

Risk warning: risk of downstream demand falling short of expectations; risk of new project progress falling short of expectations; risk exacerbated by industry competition; business operation risk.