Key points of investment:

2024 Quarterly Report: Revenue of 58.32 million yuan, +11.86% YoY; Net Profit to Mother of 1.4616 million yuan, +112.1% YoY. The 1Q24 gross profit margin was 13.95%, which was positive month-on-month, or -19pct year-on-year, mainly due to the investment period of silicon wafer products. This quarter's revenue is still far from the level of the 2022 quarter, and has reached the highest value in nearly five quarters. 1Q24 results were in line with expectations.

Expanding production strengthens the position of semiconductor etched silicon materials industry. The main products of Shengong Co., Ltd. are monocrystalline silicon materials used for etching the upper and lower electrodes and jacket rings of equipment. According to the company's annual report, the market size of this material is about 4-5 billion US dollars, and the silicon electrode market is about 10-15 billion US dollars. The core team of Shengong has more than 20 years of overseas experience. The company's technologies such as non-magnetic field large-diameter monocrystalline silicon manufacturing technology, solid-liquid coexistence interface control technology, and thermal field size optimization process are at the international advanced level. The company's core product quality indicators have reached the international advanced level, which can meet the process requirements for silicon materials in advanced chip etching processes at 7nm and below. In January 2023, the production capacity of silicon materials was about 500 tons/year; in 2023, an increase of 300 million yuan was raised to expand production of silicon materials, which will create an additional production capacity of 393 tons (equivalent to 1,145,710 mm) of silicon materials for etching per year. Of these, 150 tons of polycrystalline silicon material production expansion equipment is ready.

Production capacity for silicon parts is tight, and the localization of supporting 12-inch etching machines is being accelerated. In 2021, the company established two component factories in Jinzhou, Quanzhou, and has supporting capabilities for the entire industry chain from etching silicon materials to silicon electrodes; in 2022, it developed high-precision equipment for chemical mechanical polishing (CMP), and polycrystalline silicon structural products above 22 inches have been evaluated by a customer and achieved stable supply; the 2023 annual report shows that Shengong contacted several 12-inch integrated circuit manufacturers, and dozens of materials have obtained evaluation and certification results.

Semiconductor silicon wafers earned 8.26 million yuan in 2023, and positive film verification will be promoted in 2024. The IPO fundraising project of Shengong Co., Ltd. added 1.8 million 8-inch semiconductor polishing sheets and 360,000 semiconductor companion films per year. Production capacity of 50,000 wafers/month has been built in 2022, and equipment of 100,000 wafers/month ordered in the second phase has entered the market one after another; starting in 2022, 8-inch test silicon wafers will be officially supplied to Japanese customers, and lightweight low-defect ultra-flat silicon wafers have been certified and obtained batch orders in mainstream domestic client evaluations.

Domestic revenue share rose to 59% in 2023. Since global manufacturers of etching machines and manufacturers of silicon electrodes for etching are located in Japan, South Korea, and the United States, Shengong's main customers include international companies such as Mitsubishi Materials, SK Chemical, CoorsTek, and Hana. The share of domestic revenue increased from 1.9% in 2019 to 59% in 2023.

Maintain profit forecasts and maintain a “buy” rating. Maintain the 2024/25/26 net profit forecast of 1.1/2.6/420 million yuan. Shengong Co., Ltd. 2024PE 26X maintains a “buy” rating.

Risk warning: The semiconductor boom cycle is declining, the yield of new products has fallen short of expectations, and shareholders' holdings have reduced their holdings, causing changes in stock prices.