Key points of investment:
The third phase of the Big Fund has injected strength into the expansion of production of advanced domestic manufacturing processes, and there is plenty of room to replace domestic equipment. According to SEMI statistics, sales of integrated circuit equipment in mainland China reached US$34.2 billion in 2023, an increase of 8% over the previous year, and the global market share reached a new high of 30.3%. According to the International Semiconductor Industry Association, wafer production capacity in mainland China is expected to grow to 8.6 million wafers/month (equivalent to 8 inches) in 2024, corresponding to a production expansion of 1 million wafers/month, an increase of 23% over the 810,000 wafers/month expansion in 2023. On May 24, the third phase of the National Capital Fund was established, with a registered capital of more than the first phase and the second phase. It is expected that the largest investment area of the third phase of the Big Fund will still be the manufacturing sector with a heavy asset model. Advanced process logic and storage fabs are expected to expand production, and demand for domestic semiconductor equipment is stronger.
Beifang Huachuang lays out four types of integrated circuit equipment, and the process coverage continues to increase, significantly benefiting from the need for advanced processes to expand production.
Beifang Huachuang specializes in semiconductor equipment, vacuum and lithium battery equipment, and precision components businesses, and is deeply involved in solutions in the fields of semiconductors, new energy, and new materials. In the field of integrated circuits, four types of equipment are arranged: etching, film deposition, furnace tubes, and cleaning. The overall process coverage is high, and it has obvious advantages in the fields of ICP etching, TSV etching, PVD, and furnace tubes. North Huachuang independently produces key components and auxiliary equipment for semiconductor equipment such as RF power supplies, exhaust gas treatment equipment, gas flow meters, automation systems, etc., which helps the company reduce costs and control product quality. Advanced manufacturing processes require a long equipment verification cycle and high quality control requirements. As a platform equipment manufacturer with a broad layout, North China is expected to gain a higher share in the wave of advanced process expansion.
The three equity incentives covered thousands of employees, with the aim of strengthening technical barriers and talent barriers. Beifang Huachuang issued three equity incentive plans in 2018, 2019, and 2022, respectively. In total, shares and options granted account for 5% of the current total share capital. In addition to performance, the company's equity incentive assessment index also requires indicators such as R&D expenditure and patent applications, consolidating the company's technical advantage barriers and helping to continuously expand the scope of the company's business layout.
Advanced manufacturing processes drive up the unit price of products, and the combined scale effect is expected to increase profitability. The high technical difficulty and product complexity of advanced process equipment makes the unit price higher. The company's share of revenue in the integrated circuit field is expected to increase in the future, and at the same time, the share of advanced manufacturing processes in the integrated circuit field will increase steadily, which is expected to increase steadily. Due to the scale effect, the company's expenses rate continued to decline. In 2023, the company's total period expenses rate was 24.0%, a year-on-year decrease of 3.1 pcts. Amortization of the company's equity incentive expenses peaked in 2023 and fell to 2% of revenue in 2024. The company's net profit margin is expected to continue to rise.
Investment analysis opinion: First coverage gives the company a “buy” rating. The company's 2024-2026 revenue is expected to be 307.9, 39.98, and 50.32 billion, corresponding to year-on-year growth rates of 39.4%, 29.9%, and net profit of 57.0, 77.1, and 10.12 billion yuan, corresponding to year-on-year growth rates of 46.1%, 35.3%, and 31.3%, corresponding to dynamic PE 29, 22, 17 times, and lower than that of major overseas semiconductor equipment manufacturers such as applied materials. Using the dynamic PE relative valuation method, the company was given 39.3 times the 24-year dynamic PE, corresponding to a target market value of 223.6 billion yuan and a target price of 421.16 yuan, with room for an increase of 33.9% over the total market value at the close of June 25.
Risk warning: The scale and pace of production expansion in the fab fell short of expectations; the company's technological breakthroughs fell short of expectations.