Becker Micro is a leading supplier of analog IC pattern wafers in China. The company focuses on the industrial analog IC market and has developed the only full-stack design platform in China to open up the entire analog IC EDA+IP+ design process. We are optimistic about Beck Micro because: 1) the three differentiating advantages give the company a unique position in the market; 2) the company's revenue growth is strong (CMB International predicts a compound growth rate of 38.0% from 2023 to 2026) and stable profit margins (gross margin and net margin are expected to remain at 54% and 23% levels in 2024/25); 3) the valuation is attractive (the company's price-earnings ratio in 2024/25 was 10.3 times/7.2 times, while the average price-earnings ratio of the Hong Kong listed industry in 2024 was 30.8 times). It covered Becker Micro for the first time and gave it a “buy” rating, with a target price of HK$49.80.

Becker Micro is a leading supplier of analog IC pattern wafer products in China. According to Frost & Sullivan data, the company ranked first in the analog IC pattern wafer market by revenue in 2022, with a market share of 1.7%. However, if revenue from finished ICs is included, Becker Micro's revenue scale in 2023 was only 0.4% and 0.5% of industry leaders Texas Instruments (TXN US, unrated) and Adano (ADI US, unrated). Becker Micro is currently in the early stages of development, and the company's strategy is to use the resources of its partners to achieve rapid development in the patterned wafer market. The pattern wafer model can help the company 1) achieve strong revenue growth (with a compound growth rate of 73.6% from 2020 to 2023), 2) effectively reduce operating costs (sales and administrative expenses account for 7% of total revenue in 2023, lower than the average of 14% of domestic and international peers), and 3) maintain stable profit margins (gross margin between 55%-57% from 2020 to 2023).

The company focuses on the industrial-grade analog IC market. This market is a typical long-tail market, which has the characteristics of diversified downstream demand, high industry growth, and less intense competition than the consumer market. According to Frost & Sullivan's forecast, benefiting from the trend of industrial automation and digital transformation, China's industrial analog IC market will reach 242 billion yuan in 2027 (a compound growth rate of 9.5% from 2024 to 2027). In terms of revenue, the total market share of the top five design companies in China's industrial analog IC market in 2022 was less than 6% (Becker Micro ranked fifth). We expect the share of leading companies in this market to expand further in the future.

Becker Micro has the only full-stack analog IC design platform in China, with self-developed EDA software and a reusable IP library (over 400 IP modules). The company's full-stack analog IC design platform has the following advantages: 1) guarantees the efficiency of IC design and wafer delivery; 2) is relatively limited by geopolitical risks; and 3) realizes cost advantages.

We covered Becker Micro for the first time and gave it a “buy” rating. The target price was HK$49.80, based on 19 times the 2024 projected price-earnings ratio (corresponding to the average 1-year historical forward price-earnings ratio of Hong Kong listed companies). Becker Micro's current price-earnings ratio is only 10.3 times, and we think the company's valuation is attractive. We expect Becker Micro's revenue to grow 40% year over year in 2024, far higher than the average revenue growth rate of 1.6% in the industry (Bloomberg agreed). Potential risks: 1) the impact of macroeconomic factors; 2) changes in the company's relationships with core customers or suppliers; and 3) the development of new products falls short of expectations.