Key points of investment

Continue to deepen the collaborative advantages of the vertical industrial chain, and transform all links in the entire industrial chain to high added value. (1) LED chip:

① Production capacity: The gallium nitride chip expansion project began in April 2023, and the output was 1 million pieces (4 inch pieces) at the end of June. Subsequent production efficiency was improved. By the end of December 2023, gallium nitride production was 1.05 million pieces (4 inch pieces). The company's gallium nitride chip production capacity ranked second in the industry, and production and sales volume ranked first in the industry; during the reporting period, gallium arsenide chips produced 50,000 pieces (4 inch pieces). The expansion of LED chip production has provided the company with a driving force to increase its market share with high added value such as Mini RGB, Mini BLU, and high-end lighting. ② Production volume: During 2023, the company's mass production of Mini RGB chips is mainly 04*08 mil (100*200 μm), 03*07 mil (88*175 μm), 03*06 mil (70*160 μm), and 02*06 mil (50*150 μm). The mass produced chip size will eventually reach 02*04m (il 50*100 μm). According to the 2023 annual report of Zhaochi Co., Ltd., the company's RGB Mini chip shipments are 10,000 KK per month. ③ Product: LED market demand is recovering steadily, and downstream orders are sufficient. On the premise of ensuring the company's full production and sales, 2023H2 increased the price of LED chip products used in the general lighting market, and increased the share of high-value-added products based on capacity release, such as Mini RGB chips, backlighting chips, and high-margin lighting. In 2023, Zhaochi Semiconductor successfully entered Samsung's supply chain system.

(2) LED package: The Mini LED backlight product layout is complete, mainly including Mini COB, Mini POB, MPOB, Mini Lens and other technical paths. Currently covering TV and MNT products, we will later develop the automotive display market by relying on the company's technical strength in Mini LED. Among them, Mini LED TV backlight module customers cover leading TV brand customers at home and abroad. (3) Application: ① COB display application: In 2023, the company's COB display application achieved revenue of 541 million yuan, net profit of 0.35 million yuan, and 24Q1 achieved revenue of 295 million yuan, a significant year-on-year increase; in terms of production line output, as of April 2024, the company's monthly COB output was 16,000 square meters (measured by P1.25 point spacing), an increase of more than 400% over the previous year; the company's products have covered P0.625-P2.5. Judging from the current shipment volume, actual shipments were mainly P1.25 and P0.9. Since the beginning of 2024, the company has launched a new COB module suitable for P1.5-P2.5, and the penetration rate of P1.5-P2.5 display products has gradually increased; ②) Mini LED TV backlight applications:

The company has successfully developed major customers at home and abroad. New orders for mini LED TV backlight modules have been gradually shipped, and collaborated with the chip business to help TV ODM develop the share of mini LED TVs.

Positioned as a digital entertainment creation and distribution platform, applet content distribution is the main performance segment of popular online. In 2023, Fengxing Online achieved revenue of 675 million yuan and net profit of 94 million yuan. Fengxing Online is positioned as a digital entertainment creation and distribution platform. Currently, it has three business segments: audiovisual platform and terminal business, applet content distribution, and skit production and distribution. During 2023, on the basis that the original traditional audiovisual business remained stable, the applet content distribution business grew rapidly and became the main performance contributor to popular online. The applet business currently has more than 200 million monthly active users, 180,000 cooperative promotion experts, and promoted and operated more than 70 applets, ranking first in Douyin's official applet list. Furthermore, relying on audiovisual license qualifications and content platform advantages, Fengxing Online tests the waters of skit production and distribution with resources such as applet experts, its own audiovisual platforms, and terminal manufacturer content distribution. Currently, it has integrated and accumulated hundreds of skit resources. At the same time, the company uses AI technology to continuously develop and innovate vertical applications in the creation and promotion of movies, TV dramas, and skits. Its product Orange Star has launched a variety of AI creation tools for talented users, and is an early successful practitioner of efficiently combining AI with industrial applications and achieving commercialization.

Acquired Zhaochi Ruigu to complete vertical integration of devices and modules in the field of optical communication. In 2023, with its deep accumulation in the field of access networks and communication applications and the synergy of the Group's industrial chain, the company successfully acquired Guangdong Ruigu and the optical module team to complete the vertical integration of devices and modules in the field of optical communication. After the acquisition of Zhaochi Ruigu, the company will have a more complete optical communication industry chain and form a new vertical/intersectional industrial layout. This layout not only optimizes the company's industrial structure, but also improves overall operational efficiency, injecting strong impetus into the company's future development.

At the same time, Zhaochi Ruigu covers leading customers in the industry in the field of optical communication devices for communication access networks, and has the highest market share in the industry. According to the company's plan, in the future, Zhaochi Ruigu will actively seize the market, strive to become number one in the industry within two years, and further consolidate and enhance the company's position in the field of optical communications.

Investment advice: In view of the current semiconductor downstream recovery process, we have adjusted our original performance expectations. The estimated revenue from 2024 to 2026 is 206.73 (previous value: 211.78) /236.33 (previous value: 242.10) /253.39 billion yuan (increase), growth rates are 20.4%/14.3%/7.2%, respectively; net profit to mother is 20.68 (previous value: 21.89) /24.85 (previous value: 26.92) /27.76 (new) yuan (increase), with growth rates of 30.2%/20.2%/11.7%, respectively; corresponding PE is 12.0/ 10.0/9.0 times Considering that the excellent supply chain management capabilities and full industry chain layout of Zhaochi Co., Ltd. are firmly backed by popular Internet TV and Megachi Lighting, superimposing the deep binding of the company's LED vertical industry chain can effectively enhance the resilience of the industry cycle at a low level, and have more room for flexible growth after the industry recovers and recovers, maintaining the buy-A proposal.

Risk warning: Management risks brought about by company expansion and integration; risks caused by increased market competition; risks caused by exchange rate fluctuations; risks caused by the development of LED display technology; downstream demand falls short of expectations.