Matters:

The company announced its 2023 annual report. In 2023, the company achieved revenue of 1,251 billion yuan, an increase of 199.90% over the previous year; net profit attributable to shareholders of listed companies - 45.72 million yuan, which is narrower than the loss for the same period last year.

Ping An's point of view:

Q3 and Q4 turned to quarterly profits, and net loss narrowed for the whole year: in 2023, the company achieved revenue of 1,251 billion yuan (+199.90% YoY), net profit after deduction of 45.72 million yuan, net profit after deduction of net profit to mother - 113 million yuan, net profit to mother and net profit after deduction of net profit narrowed year-on-year losses, mainly due to the company's abundant various orders and long-term supply agreements with some customers. As production of conductive products increased, order delivery capacity increased, and product gross margin continued to rise. The company's overall gross margin and net margin in 2023 were 15.81% (+21.56pct YoY) and -3.66% (+38.36pct YoY), respectively. From the cost side, the company's cost rate for the 2023 period was 23.88% (-31.35pct YoY), and the scale effect was somewhat evident. Among them, the sales expense ratio, management expense ratio, and R&D expense ratio were 1.63% (-1.71pct YoY), 12.34% (-13.16pct YoY), -1.03% (+3.12pct YoY), and 10.97% (-19.62pct YoY), respectively. In the 2023Q4 single quarter, the company achieved revenue of 426 million yuan (+188.66% YoY, +10.12% QoQ), and maintained revenue growth for seven consecutive quarters, with net profit to mother of 22.53 million yuan (+492.61% QoQ). The gross margin and net margin for the Q4 single quarter were 17.84% (+14.6pct YoY, -0.85pct QoQ) and 5.29% (+4.31pctQoQ), respectively.

Production capacity and output have increased rapidly, and the company has risen to second place in the global market for conductive silicon carbide substrate materials:

In 2023, the Shanghai Lingang Plant successfully began product delivery in the middle of the year, and achieved a rapid rise in production capacity. The original plan for the Lingang Plant's production capacity of 300,000 conductive substrates in 2026 was realized ahead of schedule, and the company will continue to push forward the second phase of the capacity increase plan. In 2023, the company produced 262,000 silicon carbide substrates (+268.25% YoY), and sold 226,300 sheets (+254.73% YoY). In terms of customers and markets, the company has been recognized by international first-tier customers for product stability and consistency. High-quality conductive silicon carbide substrate products have accelerated “going overseas”, and received cooperation from well-known international companies in the downstream power electronics and automotive electronics fields such as Infineon and Bosch. More than 50% of the world's top ten power semiconductor companies have become the company's customers. In 2023, the company signed new long-term cooperation agreements with internationally renowned companies in the downstream power electronics and automotive electronics fields such as Infineon and Bosch to provide 6-inch conductive substrates and crystal rods to Infineon, accounting for the double-digit level of Infineon's demand. At the same time, the company will also help Infineon transform to 8-inch products. According to estimates from Fuji Economic Report, an authoritative industry research agency in Japan, the company surpassed Coherent to rank second in the world in the 2023 market for conductive silicon carbide substrate materials. On the other hand, the company has achieved the preparation of high-quality 8-inch products through independent diameter expansion. It has leading advantages in various aspects such as continuous improvement in product performance and batch preparation, and has now achieved batch sales.

Investment advice: With the rapid growth of global and domestic demand in terminal markets such as new energy vehicles, new energy power generation and energy storage, the industry's demand for silicon carbide substrates continues to be strong, and the silicon carbide sector will usher in long-term continuous growth opportunities. The company is the first domestic company to simultaneously lay out semi-insulating silicon carbide substrates and conductive silicon carbide substrates. Production capacity and output at the Shanghai Lingang Plant have increased rapidly, and it will become the company's main production base for conductive silicon carbide substrates. Since the company has not yet achieved stable profits, we chose PS valuation. Based on the company's performance forecast and judgment on industry trends, we adjusted the company's profit forecast. The company's revenue for 2024-2026 is expected to be 23.53 billion yuan (previous value: 23.72 billion yuan), 36.74 billion yuan (previous value: 39.61) billion yuan, and 50.84 billion yuan (increase), respectively. The PS corresponding to the closing price on April 12 is 8.4X, 5.4X, and 3.9X, respectively. We are optimistic about the company's leading position in the field of silicon carbide substrates and maintain the company's “recommended” rating.

Risk warning: (1) The risk of some raw materials and processing and testing equipment depending on foreign suppliers. In the future, if the country or region where the foreign supplier is located implements restrictive trade policies, the company will not be able to obtain the necessary raw materials or equipment, which will have a negative impact on the company's production and operation. (2) There is a risk that changes in national industrial policy will have a significant impact on the company's operations. If the country reduces its support for the broad-band semiconductor industry, or if the country introduces further measures such as binding industrial policies or window guidance, or if the company's proposed investment projects are included in the scope of binding industrial policy supervision and regulation, it will adversely affect the company's operations, continued profitability, and growth. (3) The high cost of silicon carbide substrates limits the risk of downstream application development. The yield of silicon carbide substrates is generally low in the short term, making it difficult to reduce costs. As a result, the penetration rate of silicon carbide devices falls short of expectations, and may adversely affect the company's operations.