Description of the event

Shengyi Technology released its 2024 quarterly report: in the first quarter of 2024, the company achieved operating income of 4.423 billion yuan, an increase of 17.77%; realized net profit of 392 million yuan, an increase of 58.25% over the previous year; and realized net profit of 386 million yuan without return to mother, an increase of 65.65% over the previous year.

Incident comments

High-end demand drives the continuous upgrading of the product structure and the steady improvement of the company's profit center. Currently, the AI industry has reached a stage of rapid development and rapid changes. Demand for high computing power continues to drive structural demand for AI servers, driving the company to continuously optimize its product structure. In the first quarter of 2024, the company's gross margin was 21.30%, +1.56pct year on year; net margin was 9.13%, +2.67pct year on year. In addition, the company's net profit to mother grew rapidly. The main reasons include: (1) the increase in the production and sales volume of the company's copper-clad board products, and the increase in operating income, which increased the company's net profit accordingly; (2) the subsidiary Shengyi Electronics continued to optimize the circuit board product structure and actively improve the regional layout of the product business. As the server market's demand for high-multi-layer printed circuit boards increased, Shengyi Electronics's production, sales and revenue increased year-on-year, increasing the company's net profit accordingly.

Actively lay out high-end fields, and customer cooperation is progressing steadily. The company has many downstream product fields, and there are significant differences in performance in market segments. Despite a marked decline in demand in downstream fields such as traditional servers and consumer electronics, demand for artificial intelligence and related products remains strong. Thanks to the advancement of automobile electrification and intelligent processes, sales of new energy vehicles are steadily rising, while also opening up growth space for automotive electronics. The company is still vigorously promoting market certification. In addition to continuing to advance and achieve good results in markets where it already has advantages such as automobiles, 5G, and energy, the company's high-end high-speed products have also obtained certification from world-renowned terminal AI servers, achieving major breakthroughs in the field of AI GPUs, and product implementation is progressing steadily.

Maintain a “buy” rating. Shengyi Technology has been deeply involved in the copper-clad plate industry for many years. From 2013 to 2022, total sales of rigid copper-clad sheets have jumped to second place in the world, and the global market share has stabilized at around 12%. In a situation where high-frequency high-speed copper-clad panels have high technical barriers, talent barriers and customer certification barriers, and face foreign technical blockades, the company has invested a large amount of human, material, and financial resources with deep technical accumulation. Currently, it has developed a full range of high-speed products with different dielectric losses, different dielectric application requirements, and high-frequency products with multiple technology routes, and has achieved a variety of batch applications. In order to meet the market's demand for next-generation general-purpose servers, AI servers, and 112 Gbps transmission links, etc., by combining early technology accumulation, the company has achieved breakthroughs in meeting next-generation ultra-low insertion loss requirements, high multi-layer processing, and multi-layer HDI applications, and has successively passed technical recognition from PCBs and end customers. With strong demand in segments such as AI servers, high-speed copper-clad panels are expected to recover first, and Shengyi Technology, which lays out high-speed copper-clad panels in depth, will fully benefit. In 2024-2026, the company is expected to achieve net profit of 1,691 billion yuan, 2,111 billion yuan, and 2,383 billion yuan, corresponding to the current PE price, which is 27.12 times, 21.72 times, and 19.24 times, respectively, maintaining a “buy” rating.

Risk warning

1. AI server delivery falls short of expectations;

2. Downstream demand growth falls short of expectations.