Key points of investment

Full process coverage/product replacement, and sales of polished hard pads exceeded 20,000 pieces in a single month in May. As the only domestic supplier of CMP polishing pads that fully master the core R&D and manufacturing technology of the entire polishing pad process, the company has completed a full range of product layouts covering CMP hard polishing pads and soft pads, which can comprehensively meet the process needs of domestic downstream wafer customers at various process nodes. (1) Full coverage of hard pads and soft pads: Comprehensive construction of a complete product system covering CMP hard pads and soft pads. The successful mass production of the CMP polishing hard pad production line at the Wuhan headquarters enabled the company's polishing pad products to be quickly introduced to mainstream domestic customers and penetrated to the first supply level; the construction of the Qianjiang CMP cushion factory in 2022 and the receipt of mass production orders further opened up more market space for mainstream domestic customers. (2) Full coverage of process nodes: On the basis of meeting the customer's mature polishing pad product needs and having a deep understanding of polishing pad production and development technology and application process, the company follows up customer needs, grows with customers, and actively develops more advanced process products. Dinglong polishing pad has hundreds of product models, with a coverage rate of nearly 100%, which can comprehensively meet the process needs of domestic downstream wafer customers at various process nodes. (3) Full coverage of application processes: In addition to being deeply involved in CMP polishing pad products in wafer manufacturing, the company has successfully expanded into the field of polishing pads for large silicon wafers and polishing pads for advanced packaging, and customers continue to expand to mainstream silicon wafer factories and packaging factory clients. Thanks to rapid advances in high computing power, AI applications, 5G communications, artificial intelligence, etc., demand for semiconductor wafers continues to grow, which is strongly driving the CMP polishing materials supply industry to flourish.

Sales of Dinghui Microelectronics CMP polishing pad products, a holding subsidiary of the company, continued to grow, and in May 2024, the monthly sales volume of hard polishing pads broke 20,000 pieces for the first time in a single month.

The three core raw materials of CMP polishing pads are fully self-produced, and production capacity reserves are sufficient. In the field of CMP polishing pads, the company has achieved full self-production of the three core raw materials of CMP polishing pads: prepolymers, microspheres, and cushions, continuously enhancing the degree of autonomous management and control of the supply chain. At the same time, it provides customers with customized product solutions based on the self-produced core raw material system, consolidating the core competitiveness of CMP polishing pad products. (1) Prepolymers: Prepolymers account for more than 70% of the weight of polishing pads, and have been exclusively reserved for foreign manufacturers for a long time. Dinglong started an autonomous raw material project in '18. Relying on the Dinglong polymer and organic synthesis platform technology accumulation, after two years of hard work, Dinglong finally completed the full autonomy of prepolymers and smoothly completed the replacement of autonomous prepolymers. (2) Microspheres: The main function of microspheres in polishing pads is to form pores and can carry polishing liquid at the microscopic level. Particle size and particle size uniformity directly affect the quality of polishing. The thermally expanded polymer microspheres in CMP polishing pads are the microsphere products with the highest technical barriers, and have always been sold exclusively by US companies. In 2021, the sole supplier announced that it would stop production, causing shock among CMP polishing pad manufacturers around the world. Using the polymer material synthesis experience accumulated over 20 years in the toner industry, combined with an understanding of microsphere products, Dinglong successfully completed small-scale industrialization of microspheres. Their particle size fluctuation is smaller, particle size distribution is narrower, application performance is more stable, and client-side self-production substitution is progressing steadily. At the same time, in order to further improve production capacity and efficiency, Dinglong has also launched a microsphere production expansion project. It is expected that it will have an annual production capacity of 50 tons of microspheres after production is put into operation, which is enough to meet the downstream demand of the Chinese CMP polishing pad market. (3) Cushions: The commissioning of the Dinglong Qianjiang polishing pad factory has significantly improved the development capacity and speed of cushions. Several self-developed special cushions have played an important role in promoting advanced process products. (4) Production capacity: The company has current production capacity conditions for 400,000 pieces of hard pads per year in Wuhan and 200,000 pieces of cushions for soft pads and polishing pads in Qianjiang. The production capacity reserves are sufficient, which can provide a solid production capacity foundation for the continued growth in sales of subsequent CMP polishing pad products. The company will also seize market opportunities, continuously increase the market share of CMP polishing pads products, and focus on further growth in CMP polishing pad business revenue and company performance.

Investment advice: In view of the current volume of the company's polishing pads and the pace of customer development, we have adjusted our original expectations.

Operating revenue from 2024 to 2026 is expected to be adjusted from 30.85/38.15/4.216 billion yuan to 32.18/38.19/4.461 billion yuan, with growth rates of 20.7%/18.7%/16.8%, respectively; net profit to mother will be adjusted from 393/596/737 million yuan to 441/611/783 million yuan, with growth rates of 98.6%/38.6%/28.1%, respectively; corresponding PE is 49.8/35.9/28.0 times, respectively. Considering that Dinglong Co., Ltd. is already the number one supplier of CMP polishing pads for some core domestic fabs, the degree of penetration is expected to continue to deepen. The superposition company has made significant progress in expanding overseas markets, and is expected to successfully obtain orders from important customers in overseas markets within this year, drive performance growth, and maintain the “buy-A” proposal.

Risk warning: Downstream terminal market demand falls short of expected risks, risks of new technologies, new processes, and new products not being industrialized as scheduled, market competition intensifies risks, systemic risks, etc., and the development of new customers falls short of expectations.