Revenue increased in Q1 2024, profitability needs to be improved

2024Q1 achieved revenue of 1,420 million yuan (yoy +12.76%), net profit attributable to mother of 212 million yuan (yoy -36.71%), and net profit of non-return to mother of 187 million yuan (yoy -42.68%). The company's profit index grew negatively in the first quarter. We believe that the main reason is that the mismatch between supply and demand in the industry caused the decline in the price of diamond wire and silicon wafer to lower the company's profit margin of diamond wire and chip foundry, which led to a decline in the company's overall profit margin. Considering that it will take time to improve the supply and demand pattern, we lowered the company's profit forecast. The net profit for 2024-2026 is estimated to be 10.80/15.69/2,049 billion yuan (previous value of 15.30/18.31/229 billion yuan), respectively; comparable to the company's 24-year average PE, 10 times PE, corresponding to a target price of 31.90 yuan (previous value 36.08 yuan), maintaining the “buy” rating.

The production and sales scale of 2024Q1's various businesses increased, and the pace of customer repayment slowed. The production and sales scale of the company's 2024Q1 business increased significantly compared to the previous period. The silicon wafer cutting and processing service business maintained a high operating rate, and the cost side of slicing continued to reduce costs and increase efficiency. However, due to falling prices in the photovoltaic industry chain, the company's short-term profitability declined. 2024Q1's contract debt was 448 million yuan, down 26.37% from 2023; 2024Q1's net cash flow from operating activities was -392 million yuan, -109.30%, mainly due to an increase in the company's sales scale, an increase in remuneration paid to employees, and a decrease in the company's receipt of other cash related to operating activities and an increase in payment of other cash related to operating activities. To a certain extent, it reflects the increasing payment pressure on upstream companies in the PV industry chain to upstream companies such as equipment and consumables.

Affected by the decline in prices of major products of companies such as diamond wire and silicon wafers, 24Q1 gross profit margin and net margin decreased by 32.39%, the company's gross profit margin was 32.39%, -10.73pp; the company's net profit margin was 14.91%, -11.65pp, mainly due to the decline in the overall price of the photovoltaic industry chain. The prices of products such as diamond wire and silicon wafer surplus sheets declined significantly; 24Q1 company's sales/management/R&D/financial expenses ratio were 3.05%/8.24%/5.78%/0.50%, respectively , +1.24pp/+3.23pp/ -0.05pp/-0.12pp, year-on-year, the total rate for the period was 17.56%, +4.30pp year-on-year.

Thinning is beneficial to the company's technical barriers and cost reduction. Silicon carbide and semiconductors open up long-term space. The company insists on high-carbon steel wire and tungsten wire thin wire R&D testing, so that the company has a certain low cost advantage in carrying out silicon wafer cutting and processing services, uses the comparative advantages of self-produced equipment technology to improve slice yield and release rate, and at the same time feed back the development of equipment and diamond wire through foundry slicing equipment and diamond wire research and development, forming a closed-loop advantage. In the future, as tungsten wire and high-carbon steel wire become finer, the company is expected to consolidate its technical barriers, optimize its own costs, and improve profit margins. In the semiconductor and silicon carbide sector, the company's 6-inch silicon carbide diamond wire slicer achieved mass sales in 2022. At the end of 2022, the company upgraded to launch compatible 6-inch and 8-inch silicon carbide diamond wire slicers. Bulk orders were formed in 2023 and were highly recognized by leading customers; the 8-inch semiconductor slicer has been mass-produced by clients; and the 12-inch semiconductor slicer prototype is in the customer's incoming material verification stage. Semiconductors and silicon carbide are expected to open up long-term space for the company.

Risk warning: The price war in the main photovoltaic industry chain is intense, competition for diamond cables is intensifying, and technology research and development falls short of expectations.