Key points of investment:

Years of accumulation have built up barriers, and the performance is outstanding. Huahai Qingke began with the transformation of achievements at Tsinghua University. In 2022, it became a state-owned subsidiary in Sichuan and listed, and has been deeply involved in the field of CMP technology for more than 10 years. 1) Technical and market barriers have been established in the CMP field. According to the company's annual report, the company has independent intellectual property rights for 12-inch CMP equipment and has basically covered a large domestic 12-inch advanced integrated circuit production line; in June 2024, the “Key Technology and Equipment for Integrated Circuit Chemical Mechanical Polishing” project jointly completed by Huaqing Haike and Tsinghua University won the first prize of the 2023 National Technological Invention Award; 2) Technological achievements have been transformed into excellent performance, with 2023 revenue of 2.508 billion yuan, 2017-2023 The annual CAGR was 125.3%, and CMP equipment revenue contributed about 90%; net profit to mother was 0.724 billion yuan, and the 2020-2023 CAGR was 64.9%. 2024H1 maintained its performance growth trend, achieving revenue of 1.497 billion yuan, a year-on-year increase of 21.2%; net profit to mother of 0.433 billion yuan, an increase of 15.7% over the previous year.

The semiconductor market is recovering, the frequency of use is increasing due to advances in stacking technology, and CMP equipment has room for growth. 1) Determination of the trend of domestic fabs to expand production will drive demand for semiconductor equipment to rise further. According to the forecast of SEMI (International Semiconductor Industry Association) in June 2024, the production capacity of Chinese wafers will reach 8.85 million wafers per month and 10.1 million wafers per month (8 inch equivalent) in 2024 and 2025, respectively, with year-on-year increases of 14% and 15%. 2) Demand for CMP equipment increased with the progress of the manufacturing process. The 8-inch production line with mature production capacity required an average of 3.7 CMP units per 10,000 pieces, while the 12-inch production line for advanced processes rose to 17.5 units; 3) There is a large domestic replacement space, and the company's market share is steadily increasing: the CMP equipment market has long been monopolized by the US Applied Materials and Japan's Ebara, and the global market share is over 90%. Domestic Huahai Qingke has been able to completely replace equipment above the 14nm node, and key components have basically been replaced by domestic production. According to Rui Industrial, the localization rate of CMP equipment has increased from 3% in 2017 to 40% in 2023, and is expected to reach 70% in 2027. Based on the calculation that CMP equipment accounts for 2.5% of semiconductor equipment, the CMP market in mainland China was about 6.4 billion yuan in 2023, and Huahai Qingke's market share reached 35%.

The platform-based strategic layout of “equipment+service” creates new profit growth points. 1) Enter the front and rear equipment circuit related to the CMP process to open up market space: By the end of 2023, the thinning equipment, cutting equipment, and cleaning equipment developed by the company had all been sent to the client for verification. According to QYR (Hengzhou Bozhi), the global market size of the three types of equipment in 2023 is 0.902, 1.725, and 4.059 billion US dollars, respectively, and is expected to reach 1.393, 2.516, and 5.549 billion US dollars respectively in 2030. The total market space for the three fields of the new layout is about 2.1 times that of CMP equipment. 2) Semiconductor equipment is affected by the downstream expansion cycle, and the company's wafer recycling and maintenance consumables business can effectively smooth revenue fluctuations. On the one hand, the domestic wafer recycling business is still in the early stages of development, and there is plenty of room for growth in the international market: according to our estimates, the global wafer recycling market is about 1.053 billion US dollars in 2023, and QYR (Hengzhou Bozhi) is expected to reach 1.979 billion US dollars in 2029. Based on this calculation, CAGR will reach more than 11% in the next few years. On the other hand, the maintenance consumables business targets CMP equipment that has already been sold and is stable. Currently, this business accounts for less than 10% of revenue, and there is plenty of room for improvement. Referring to the application materials of mature overseas semiconductor equipment manufacturers, its service revenue share in revenue has remained around 20% for a long time.

Covered for the first time, a “gain” rating was given. We predict that the company's net profit for 2024-2026 will be 1.009/1.303/1.606 billion yuan, respectively, and the PE corresponding to the current stock price (2024/8/19) will be 31/24/19 times, respectively. Comparable companies' average PE in 2024-2026 was 36/27/21 times, respectively. The company's PE is lower than the average of comparable companies, giving it an “overweight” rating.

Risk warning: Risk of downstream fab expansion falling short of expectations, risk of market development for new products and services falling short of expectations, risk of technological innovation.