Key points of investment
Affected by downstream demand, the performance phase was under pressure: 2024Q1 achieved operating income of 1.42 billion yuan, +13% year over year; net profit to mother of 210 million yuan, -37% year over year; net profit after deducting non-return to mother was 190 million yuan, -43% year over year. We expect the 2024Q1 diamond wire shipment volume to be about 15 million kilometers, and the chip OEM shipment will be 10GW.
Profitability declined: 2024Q1's comprehensive gross profit margin was 32.4%, -10.7pct year on year; net profit margin was 14.9%, -11.7pct year on year; the period expense ratio was 17.6%, +4.3pct year on year, of which the sales expenses ratio was 3.0%, +1.2pct year on year, management expense ratio (including R&D expenses) was 14.0%, +3.2pct year on year, financial expenses ratio was 0.5%, -0.1 pct year on year.
Inventory & contract liabilities are relatively stable: as of March 31, 2024, the company's inventory was 1.39 billion yuan, +35% year over year, contract liabilities were 450 million yuan, -10% year over year; the company's net cash flow from operating activities in 2024Q1 was -3.9 billion yuan, mainly due to high production payments.
Slicing foundry continues to penetrate, and the operating rate is expected to continue to increase: by the end of 2023, the company's slicing foundry production capacity has reached 38 GW, the annual effective shipment is about 25.5 GW, and 25 GW of Yibin (Phase I) has entered the production preparation stage. The total production capacity is expected to reach 63 GW after delivery in the first half of 2024. The operating rate of the 2023Q4 high-measurement chip foundry business is about 60%-80%, but it is still higher than the industry average of 50-60%. We believe that in the future, as high measurement benefits customers through technical advantages, it is expected that the market share of chip foundry will be further increased, ensure that the production capacity operating rate is stable at around 80%, and further reduce costs and increase profit levels.
Diamond wire continued to reduce costs and increase efficiency, and gross margin increased dramatically: 2023Q4 shipments were reduced to a certain extent due to industry demand. The 2023 Jingang Line originally planned to ship 60 million kilometers, actual shipment was about 56 million kilometers, +66% year over year, annual sales volume (excluding personal use) was about 38 million kilometers, +51% year over year, and the market share increased steadily. At the end of 2023, the company's Diamond Wire production capacity reached 60 million kilometers. After all production capacity in Huguan (Phase I) was released, the company's production capacity could reach more than 100 million kilometers. The company will accelerate the development and expansion of tungsten wire. It is estimated that tungsten wire shipments will account for more than 20% of total shipments in 2024. At the same time, it will promote the transformation and upgrading of intelligent diamond wire manufacturing from the three aspects of lean, automation, and digitalization, reduce costs and increase efficiency, and maintain the profitability of the diamond wire business in the declining price range of the industrial chain.
Profit forecast and investment rating: Considering the impact of downstream demand, we maintained the company's 2024-2026 net profit of 9.9/13.8/1.68 billion yuan, corresponding PE of 10/7/6 times, and maintained a “buy” rating.
Risk warning: New product expansion falls short of expectations, and downstream production expansion falls short of expectations.