Key points of investment

Incident: On August 30, Zhengfan Technology released its 2024 semi-annual report. In the first half of 2024, the company achieved revenue of 1.852 billion yuan, up 37.78% year on year; net profit to mother was 0.105 billion yuan, down 29.94% year on year; net profit after deducting non-return to mother was 0.114 billion yuan, up 53.05% year on year. In the second quarter of 2024, the company achieved revenue of 1.264 billion yuan, a year-on-year increase of 35.34%; net profit to mother was 0.08 billion yuan, a year-on-year decrease of 42.27%; net profit after deducting non-return to mother was 0.098 billion yuan, an increase of 45.48% year-on-year.

Downstream demand is growing, and on-hand contracts are sufficient. In the first half of 2024, the company achieved 3.94 billion yuan in new contracts, of which new contracts from the semiconductor industry increased 11.4% year on year, accounting for 50%; as of 24H1, active contracts were 8.2 billion yuan, up 45.6% year on year, of which the semiconductor industry accounted for 52%, reflecting good downstream demand for semiconductors, and the company had plenty of orders in hand, laying a good foundation for subsequent performance growth.

Profits fluctuated in the short term due to increased R&D expenses and changes in fair value. The company's gross margin for the first half of 2024 was 26.91%. Compared with 27.11% for the full year of 2023, there was little change. The main reason for the year-on-year decline in net profit to mother was an increase in R&D expenses and changes in fair value. In the first half of 2024, the company's R&D expenses were 0.156 billion yuan, an increase of 85.90% over the previous year. The main reason was the material consumption of the company's R&D investment in expanding the R&D team, technology development, and new industry development, and the increase in overall R&D personnel remuneration. In addition, the company's fair value change revenue for the first half of 2024 was -0.026 billion yuan, mainly due to a decrease in the year-end valuation of the company's equity investment in Qingdao Juyuan Yinxin.

The layout is extensive, and the three major business segments continue to gain strength. 1) In the field of key manufacturing systems and equipment, the company's main products include electronic process equipment, biopharmaceutical equipment, etc. At present, the company's high-purity medium supply system is in a leading position in China, and Gas Box products have been supplied in batches to leading domestic semiconductor equipment and photovoltaic cell process equipment manufacturers. 2) In the field of key materials, the company's business mainly includes electronic specialty gas, electronic bulk gas, and high-purity industrial gases, and advanced materials. Among them, the precursor manufacturing base built by the company at the Tongling electronic materials production base will cover more than 20 types of precursor products, involving the four major categories of silicon-based, metal-based, high-K and low-K. It is expected to be put into operation in the third quarter of 2024, and gradually reach production in 2025. 3) In the field of professional services, the company already has the comprehensive ability to provide customers with MRO one-stop service.

Investment advice. With the continuous expansion of downstream semiconductor and photovoltaic production and the accelerated development of the company's materials business, we expect the company to achieve revenue of 5.361/6.795/7.949 billion yuan in 24-26, achieve net profit of 0.555/0.793/0.983 billion yuan, and maintain a “buy” rating of 13/9/8 times PE corresponding to the market value on September 3, respectively.

Risk warning: Downstream demand falls short of expectations; industry competition increases risk; company's new business development falls short of expected risk, etc.