The proportion of LED high-end products has increased, and the product structure has improved. The company's LED epitaxial chip product revenue increased 6% in 2023. Among them, traditional LED epitaxial chip product revenue increased 4% year over year, and high-end product revenue increased 14% year over year, achieving initial product structure adjustments. Demand in the LED market gradually recovered in the second half of '23, and equipment utilization gradually picked up. The company's Mini LED sales volume continues to grow. Micro LED is cooperating with major domestic and foreign manufacturers. MIP already has mass production conditions. Multiple automotive LED products have entered the mass production and delivery stage, and products such as plant lighting products, lasers, and high-end mobile phone flashes are progressing well. The profitability of the LED business is expected to improve further as the share of high-end products and equipment utilization increases in the future.

The gallium nitride radio frequency business is growing steadily. The company's GaAs RF business terminal customers include mainstream mobile phone brand customers at home and abroad as well as the top three domestic ODM customers. Second-generation high-power base station products were successfully mass-produced in October 2023, and third-generation product development for the 5G-A market is progressing. In the second half of 2023, benefiting from the recovery in consumer demand and supply chain changes, the company's shipments increased rapidly, and the capacity utilization rate increased month by month; the company's own epitaxial production has been verified and passed by customers, and the epitaxial self-sufficiency rate has increased rapidly, and the revenue scale and profitability of the gallium arsenide RF business is expected to increase.

The silicon carbide business is progressing smoothly. Hunan San'an already has a monthly production capacity of 16,000 silicon carbide tablets, a monthly production capacity of 2,000 silicon-based gallium nitride tablets, cooperation intentions and more than 800 customers. The 6-inch silicon carbide substrates have been shipped in batches to international customers, and the 8-inch substrate epitaxial process has been commissioned and samples sent to key overseas customers for verification. The automotive-grade 1200V/16mΩ silicon carbide MOSFET has passed the AEC-Q101 standard and has been tested for key NEV customer modules.

Hunan San'an reached a strategic partnership with global power giant Verdi Technology, which is expected to be used in data centers, communication networks, etc. Suzhou Scott Semiconductor, a joint venture established by Hunan San'an and Ideal Auto, has entered the trial production stage and is expected to be officially mass-produced in August 2024. An Yifa, a joint venture established by Hunan Sanan and STMicroelectronics in Chongqing, expects to be equipped with a monthly production capacity of 8” 8,000-10,000 tablets in 2024. Production capacity will be gradually released by the end of 2024, and production capacity will be gradually released in 2025. The production capacity is planned to reach 10,000 pieces/week after production in 2028.

We forecast that the company's net profit for 24-26 will be 11.5/17.9/2.66 billion yuan respectively (the original 24-25 forecast was 25.2/3.15 billion yuan respectively, mainly based on lower revenue and gross margin forecasts based on market conditions). Based on comparable companies' 25-year PE valuation 40 times, corresponding to a target price of 14.40 yuan, the corresponding target price was 14.40 yuan, maintaining the purchase rating.

Risk warning

LED demand fell short of expectations; MiniLED and compound semiconductors fell short of expectations.