Incident: The company released its 2023 annual report and the first quarter report of 2024. In 2023, the company achieved revenue of 2,903 billion yuan, an increase of 23.28%; realized net profit of 846 million yuan, a year-on-year decrease of 475.16%; and realized deduction of non-net profit of 932 million yuan, a year-on-year decrease of 126.23%. In 2024, Q1 achieved revenue of 829 million yuan, up 107.51% year on year and down 9.75% month on month; realized net profit to mother - 107 million yuan, up 13.24% year on year, up 61.25% month on month; deducted non-net profit - 136 million yuan, up 7.92% year on year, up 54.18% month on month.

Benefiting from the continued recovery of the LED industry, the 24Q1 net margin improved year-on-month: In 2023, the company was deeply involved in LED chip lighting, display, backlighting and other market segments, and actively implemented full sales promotion strategies. LED chip sales increased 110.66% year on year; affected by the company's market strategy adjustments, the Q4 capacity utilization rate reached full production, and LED chip production increased 48.44% year on year. In order to improve inventory turnover, improve operating performance, and implement an inventory removal strategy, the company's LED substrate inventory fell 45.96% year on year in 2023. At the same time, benefiting from the gradual recovery of the LED industry and increased market demand, the company's revenue doubled year-on-year in Q1 in '24. In 2023, the company's gross margin was -8.50%, -16.66pcts year on year; net margin was -29.13%, -22.89pcts year on year. The company's gross margin in Q1 '24 was -4.10%, -5.86pcts year on year, +4.18pcts month-on-month; net margin was -12.97%, +18.05pcts yoy, +17.23pcts month-on-month. In terms of expenses, the company's sales, management, R&D and financial expenses rates in 2023 were 1.19%/6.05%/6.38%/3.12%, respectively, with year-on-year changes of -0.01/-2.02/+0.05/+0.21pcts, respectively.

Leveraging its leading edge in technology and continuing to deepen the Mini/Micro LED layout: The company is one of the earliest chip companies in the industry to develop Mini/Micro technology. Currently, its technical level and shipment volume are leading in the industry: the company's Mini LED RGB chip products have been used in many key projects of mainstream Mini LED terminal manufacturers; Mini LED backlight chips have been used in smart screens, televisions, laptop computers, e-sports displays, and in-vehicle central control screen series. In July 2023, Guangdong Huacan's Zhuhai Micro LED wafer manufacturing and packaging testing base project started, and successfully capped on January 31, 2024. The project will create a micro LED wafer and pixel device production line, provide customers with high quality micro LED products with different application requirements, achieve high production yield under good luminescence efficiency and wavelength consistency conditions, initially realize the industrialization of Micro LED, and gradually improve the company's Micro LED ecosystem layout. As Micro LED technology projects advance and market penetration accelerates, the company's revenue is expected to continue to grow and profitability is expected to further improve.

Build the second growth pole in the GaN business and expect new product release: According to the company's 2023 annual report, GaN power semiconductors have developed rapidly in recent years. According to experts, research expects the global GaN power semiconductor production value to reach 509 million US dollars in 2023, +82% over the same period. The output value of the global GaN power semiconductor market is expected to reach 2,498 million US dollars by 2028. The company began entering the field of GaN power electronics devices in 2020. Its products are mainly aimed at consumer fast charging, other power supplies, data center power supplies and automotive applications. In 2023, in terms of substrate research and development, the subsidiary Yunnan Lanjing has achieved specification optimization and mass production of 6inch sapphire substrates; in terms of devices, it has completed samples and tests of 650V GaN on Si and higher voltage GaN on Sapphire products, where the performance of the 650V GaN on Si device can meet high-frequency 65W fast charging applications; in terms of GaN process technology, it has been fully connected in 2023, which can achieve flow from epitaxial to chip; in terms of GaN epitaxial, it has been achieved 6/8 The optimization of crack-free HEMT epitaxial extension on an inch silicon substrate has reached an ideal level of surface roughness and thickness consistency. Currently, the company's GaN-based power electronics devices are in the R&D and mass production breakthrough stage. They are expected to pass reliability verification by the end of 2024 and have the conditions for mass production.

First coverage, giving an “additional” rating: The company's main business is mainly R&D, production and sales of LED substrates, epitaxial films and chips. The company is a first-tier supplier in the LED epitaxial and chip industry, and sapphire substrates maintain its position as a leading supplier in the domestic market. The company is one of the earliest chip companies in the industry to develop Mini/Micro technology. Currently, its technical level and shipment volume are leading in the industry. Its partners cover most leading companies in the industry, including well-known companies such as BOE and Innocent. In 2023, thanks to the gradual recovery in LED market demand and the acceleration of application penetration of miniLED technology, the company achieved rapid revenue growth. We are optimistic about the promotion of the company's Micro LED technology project and the breakthrough in mass production of GaN power electronic device products. The company's net profit for 2024-2026 is -162 million yuan, 247 million yuan, and 469 million yuan respectively, EPS is -0.10 yuan, 0.15 yuan, 0.29 yuan, and PE in 25-26 is 32X and 17X respectively.

Risk warning: Downstream demand recovery falls short of expectations, risk of expanding new semiconductor business, risk of market competition, risk of technological innovation.