Incident: The company released its 2023 annual report and 2024 quarterly report, with impressive growth in Q1. In 2023, the company achieved operating income of 4.738 billion yuan, +11.24% year on year; net profit to mother was 579 million yuan, +10.43% year over year. Benefiting from the recovery in the downstream semiconductor industry, 2024Q1 achieved revenue of 1,618 million yuan, +51.09% year on year; net profit to mother of 246 million yuan, +42.21% year over year; and net profit of 239 million yuan, +55.67% year over year. We estimate that the company's net profit in 2024 will be 1.04 billion yuan, corresponding to only 27.8 times PE during the year, and the valuation is relatively safe among domestic semiconductor material platform manufacturers.

Leading IDM manufacturers have entered the production expansion cycle, and demand for localization of core semiconductor materials opens up. With the continuous advancement of production technology and the continuous support of national industrial policy/large funds, leading domestic storage IDM vendors such as Changxin and Changcun have accelerated their rise. After experiencing fluctuations in industry sentiment and external constraints, domestic storage vendors have now entered a cycle of capacity expansion (including Changxin Phase II and Changzang Phase II projects, etc.). Under the trend of autonomous and controllable core raw materials such as precursors, local material manufacturers welcome historic development opportunities.

The storage economy is recovering, and demand for HBM is rising, and the “light boat has passed 10,000 mountains” in the precursor sector. The storage industry experienced a round of inventory removal cycles in 2023. Since Q4, with the recovery in demand for PCs and mobile phones and demand for HBM memory with AI, the operating rate of core manufacturers has rebounded, and the industry has entered the inventory replenishment cycle.

In 24Q2, Samsung has raised the DRAM wafer delivery volume to 600,000, +13% month-on-month. 24Q1DRAM/NAND contract prices are +13%-18%/+18%-23% month-on-month, and TrendForce expects memory prices to rise 60% by the end of 2024. Driven by AI demand, HBM orders are currently full. SK Hynix plans to increase HBM production capacity by more than 1 times in 2024 and reach 100 million units/year in 2030; Samsung plans to increase HBM production 2.5 times that of 2023 and further double in 2025. As the only semiconductor precursor manufacturer in China, the company is tied to SK Hynix, the leader of HBM, and has fully benefited from the reversal of storage cycles and the increase in material usage/unit value driven by HBM demand.

Build a one-stop electronic materials platform, and continue to fulfill orders for LNG sheets. 1) Photoresist: Based on the technical advantages of panel photoresist, the company continues to develop semiconductor photoresists, and has now entered the client testing and introduction stage. As of the annual report, the construction progress of the photoresist project has reached 75%; 2) Silicon powder: The subsidiary Huafei Electronics is a leading domestic manufacturer of silicon powder, with technical reserves for high-value-added products such as low-α and MUF. The production capacity of 39,000 tons of semiconductor packaging under construction targets Japanese manufacturers for domestic replacement. As of the annual report, construction progress has reached 20%; 3) LNG sheet: The company is the only domestic plate manufacturer that has passed French GTT certification, and has established strategic partnerships with shipbuilders such as Hudong and Jiangnan.

Profit forecast and valuation suggestions: We expect the company's revenue for 2024-2026 to be 69.10/81.50/8.650 billion yuan, respectively, and net profit to mother of 1,040/12.48/1,438 billion yuan, respectively, and corresponding PE 27.8/23.1/20.1 times, respectively. The company is a platform manufacturer of electronic materials and will expand around a series of advanced process materials in the future. The rise of domestic storage is compounded by AI servers driving HBM expansion, and the company is expected to usher in new growth opportunities and maintain a “buy” rating.

Risk warning: downstream demand falls short of expectations, project construction progress falls short of expectations, and the competitive landscape deteriorates.