Incident: The company released the 2023 annual report and the 2024 quarterly report. For the full year of 2023, the company achieved operating income of 1,629 million yuan, an increase of 23.71% over the previous year; realized net profit of 372 million yuan, an increase of 22.59% over the previous year; and realized deducted non-net profit of 340 million yuan, an increase of 25.29% over the previous year. In 2024, Q1 achieved operating income of 443 million yuan, up 43.74% year on year and down 8.03% month on month; net profit to mother was 77 million yuan, up 150.51% year on year and down 39.48% month on month; after deducting non-net profit of 73 million yuan, up 169.05% year on year, down 40.91% month on month.

Net profit increased in 23, and profit margins improved dramatically in Q4: In 2023, the company continuously strengthened its core capabilities in the field of advanced packaging testing, continued to improve technical level, expand the scope of product application, reduce production costs, improve daily operation efficiency, and achieved both revenue and profit growth. In 2023, the company's overall gross margin was 35.72%, -3.69pcts year on year, mainly due to a year-on-year increase in fixed costs such as equipment depreciation; the net interest rate was 22.81%, -0.21pct year on year. The impact of the decline in gross margin on net interest rate was partially offset by a decrease in the overall period of expenses and an increase in other earnings. In Q4 2023, thanks to the recovery in the semiconductor industry, the company's profitability improved significantly. In Q4 2023, the company's overall gross margin was 38.36%, +2.92 pcts year on year; net margin was 26.28%, +9.50 pcts year on year. In terms of expenses, the company's sales, management, R&D and financial expense ratios for the full year of 2023 were 0.63%/6.12%/6.52%/-1.36%, respectively, with year-on-year changes of -0.14/+0.66/-1.07/-2.74pcts, respectively. Among them, the financial expense ratio and absolute value both declined year-on-year, mainly due to increased interest income and exchange earnings.

DDIC's leading position in packaging and testing is stable, and its business layout is expanding steadily: According to the company's 2023 annual report, the company's annual display driver chip packaging and testing business sold 1,391 billion units and generated revenue of 1,463 billion yuan. It is the display driver chip packaging and testing company with the highest revenue in China, and ranks third in the global display driver chip packaging and testing field. While continuously consolidating its dominant position in the field of display driver chip packaging and testing, the company gradually expanded its business into the field of non-display chip packaging and testing, mainly power management chips and RF front-end chips, continued to expand its technical product line, continue to make efforts in new processes, new products, etc., to the upper end of the value chain, actively expand the company's business layout, and move towards advanced integrated circuit sealing and testing manufacturers. In 2023, the company's non-display chip packaging and testing revenue was 130 million yuan, an increase of 8.09% over the previous year.

The 12-inch wafer sealing and testing project in Hefei was put into operation, and the share of AMOLED revenue continued to increase: In 2023, the company actively allocated various internal resources, promoted the construction of fund-raising projects, and strived to achieve the expected benefits of the fund-raising project as scheduled. Among them, the Hefei Qizhong Advanced Packaging Testing and Production Base Project was completed in August 2023, and commenced in September 2023. Customer certification was carried out in Q4 of 2023, and mass production began in 2024. Combined with the industrial chain integrity of local upstream and downstream panel factories, the project mainly focuses on the packaging testing business for 12-inch wafers of display driver chips. Furthermore, thanks to the AMOLED layout of major panel manufacturers such as BOE, Vicino, and Tianma, the AMOLED penetration rate continues to grow.

The company's annual report shows that according to CINNO Research data, the global market shipped about 690 million AMOLED smartphone panels in 2023, an increase of about 16% over the previous year; in addition, according to Omdia estimates, demand for AMOLED smartphones will continue to grow; at the same time, as other applications improve, the AMOLED display driver chip market will maintain double-digit growth until 2028. With the rapid penetration of AMOLED products in smart phones and other fields, the company's AMOLED revenue share is gradually rising. In 2023, the company's AMOLED products accounted for about 20% of revenue.

Profit forecast was raised and given a “buy” rating: The company is mainly engaged in advanced packaging and testing of integrated circuits, mainly focusing on the field of packaging and testing of display driver chips and the field of non-display chips represented by power management chips and RF front-end chips. In 2023, the company continued to strengthen its core capabilities in the field of advanced packaging testing, continuously improving the technical level, expanding the scope of product application, reducing production costs, improving daily operating efficiency, and achieving both revenue and profit growth. Looking forward to the future, as demand for consumer electronics picks up and the boom in the semiconductor industry recovers, the company's profitability is expected to be further restored; at the same time, as AMOLED penetration continues to increase and the company's 12-inch wafer sealing and testing capacity in Hefei is released in an orderly manner, the company is expected to further open up the growth ceiling. Considering that the improvement in the company's profitability was better than expected, the profit forecast was raised; at the same time, considering the pace of production capacity release at the company's Hefei sealing and testing plant and the progress of the AMOLED business, the estimate was raised to a “buy” rating. We estimate that the company's net profit for 2024-2026 will be 492 million yuan, 596 million yuan, and 678 million yuan, EPS 0.41 yuan, 0.50 yuan, and 0.57 yuan respectively, and PE is 24X, 20X, and 18X respectively.

Risk warning: Risk of developing non-display businesses falling short of expectations, risk of increased market competition, risk of exchange rate fluctuations, risk of industry fluctuations and changes in demand.