San'an Optoelectronics released its 2023 Annual Report and 2024 Quarterly Report. In 2023, the company achieved revenue of 14.05 billion yuan, yoy +6.3%, net profit to mother of 370 million yuan, yoy -46.5%, net profit after deducting non-return to mother of 1.09 billion yuan, and net profit of non-return to mother of -310 million yuan for the same period in '22. The comprehensive gross profit margin for the year was 10.4%, -7.5% year-on-year, and the net profit margin to mother was 2.6%, or -2.6% year-on-year. Downstream demand in the LED industry was weak in the first half of 2023, competition in the chip market was fierce, and the revenue and profitability of chip manufacturers were under pressure. Since the second half of the year, the market has gradually picked up, the company's capacity utilization rate has rebounded, and revenue performance has gradually improved. In 2024Q1, the company achieved revenue of 3.56 billion yuan, yoy +22.3%, net profit attributable to mother of 120 million yuan, yoy -44.4%, net profit after deducting non-return to mother of 32.27 million yuan, and net profit after deducting non-return to mother of -181 million yuan for the same period in '23, a significant improvement over the previous year. The consolidated gross profit margin for the single quarter was 14.8%, and the net profit margin was 3.3%. Thanks to the optimization of the company's product structure, the quarterly profit level has been significantly restored. With the increase in the share of high-end LED products and the gradual expansion of the integrated circuit business, we believe that the company's profit level is expected to continue to improve.

LED lamps may usher in a second peak of replacement, and Mini/Micro LED empowers the high-end. In 2023, the company's LED epitaxial chip product revenue increased 6.3% year on year. Among them, traditional LED business revenue increased 3.9% year on year, and high-end LED business revenue increased 14.0% year on year. On the one hand, demand in the traditional LED industry has gradually recovered since 2023H2, and short-term LED lamps are about to usher in a peak demand for secondary replacement. The company's equipment utilization rate is increasing and profitability is improving steadily; on the other hand, the company's use in high-end LED products such as plant lighting and car lamps continues to grow, helping to optimize the structure. Sanan Optoelectronics Mini LED has been used in televisions, laptops, in-vehicle displays, VR, etc., and sales volume continues to grow; Micro LED technology has significant advantages and has cooperated with major domestic and foreign manufacturers. MIP already has mass production conditions, and product yield is constantly improving. The penetration rate of Mini/Micro LED terminals has gradually increased, enabling the company to upgrade its LED business.

Accelerate breakthroughs in various integrated circuit businesses. 1) RF business: The company's gallium nitride radio frequency second-generation high-power base station products were mass-produced in October 2023. It is promoting the development of third-generation products for the 5G-A market, and has made breakthrough progress in international business. The company's gallium arsenide RF foundry production capacity is 15,000 pieces/month. The terminal customers cover mainstream mobile phone customers at home and abroad and the three major domestic ODM customers. The operating rate has increased from 20%-50% of 23H1 to more than 85% at present. The company's filter production capacity is 150 KK/month, and the operating rate has increased from less than 20% of 23H1 to 50% at the end of the year. Utilization rate restoration has led to a continuous increase in the revenue and profit level of the RF business. 2) Optical technology: The company's DFB/PD products have become mainstream solutions in the field of access networks, and VCSEL has received orders from major customers in the field of data communication. The company's market share of optical technology products continues to increase. PD's domestic market share is about 55%, VCSEL is about 30%, and DFB is about 15%. The company's development of VCSEL and HP DFB series products for AI optical modules has progressed in stages. 200G and 400G optical module VCSEL chip products have been developed, and 800G optical module VCSEL chip products are being developed. 3) Power electronics: Hunan San'an has a silicon carbide supporting production capacity of 16,000 pieces/month, silicon-based gallium nitride production capacity of 2,000 pieces/month, cooperation intentions and more than 800 customers. The company's 6-inch silicon carbide substrates have been shipped in batches to international customers, the 8-inch substrate epitaxial process commissioning has been completed, and samples have been sent to key overseas customers for verification. As of the end of 2023, the 1200V/16mΩ silicon carbide MOSFET used as the main drive for electric vehicles has overcome reliability issues and passed the AEC-Q101 standard, and has been tested for key NEV customer modules. The customer base in San'an, Hunan continues to expand, and strategic cooperation has been reached with global power giant Verdi Technology, NEV leader Ideal Auto, and global power semiconductor leader ST Semiconductors. In 2023, Hunan San'an achieved revenue of 950 million yuan, yoy +49%, net profit of 270 million yuan, and yoy +688%. In the future, as the company's silicon carbide MOSFET product certification is passed, the silicon carbide business is expected to usher in volume growth.

Profit forecast and investment advice: We expect the company to achieve revenue of $180.4/219.5/26.29 billion and net profit of $14.7/20.4/2.65 billion in 2024/2026 respectively, maintaining the “Highly Recommended” rating.

Risk warning: LED industry demand falls short of expectations, compound semiconductor business progress falls short of expectations, risk of international trade disputes.