Incidents:

On September 20, Debon Technology announced the signing of the “Intent to Acquire Agreement” to acquire 53% of the shares of Hengshuo Warwick held by Yongli Industrial and Shuhui Industrial in cash.

Comment:

A leading manufacturer of domestic epoxy encapsulants, with a perfect layout of advanced packaging products. The target company involved in this “Acquisition Intent Agreement” is Hengshuo Warwick Electronics Co., Ltd., whose main products are epoxy encapsulants. It currently has 12 production lines, and has more than 100 models of products such as the Hysol brand and the KL, GR, and MG series. The company's sales network covers major markets around the world, providing specialized products and services for well-known domestic and foreign semiconductor integrated equipment manufacturers and leading packaging and testing companies such as Infineon (Infineon), Onsemi (Onsemi), Nexperia (Nexperia), Changdian, Huatian, Tongfu Microelectronics, and Silan Micro. According to Prismark statistics, in 2023, Hengsuo Warwick ranked third in sales among global epoxy encapsulants companies, ranked fourth in sales, and ranked first in sales and sales among domestic epoxy encapsulants companies. The company's wholly-owned Korean subsidiary Hysol EM has a complete product matrix for advanced packaging, including black epoxy molding compounds for semiconductor packaging, white and transparent epoxy molding materials for optoelectronic device packaging, underfill and high thermal conductivity coating materials for LCD TVs and mobile phones, and liquid EMC for FOWLP. It has now successfully entered major overseas manufacturers such as SK Hynix, LG Chem, Korea Electronics (KEC), and LUMENS. According to the “Notice of Intent to Acquire Agreement”, Hengshuo Huawei expects to achieve a profit of not less than 53 million yuan this year, and the total realized profit for 2024-2026 will not be less than 0.185 billion yuan. If the acquisition is successfully completed, it will contribute significant profit growth to Debon Technology every year.

The semiconductor adhesive material is fully covered, and the platform-based layout has been completed. Debon Technology has a rich product layout in the semiconductor packaging field, including various adhesives such as underfill underfill adhesives, TIM cooling adhesives, AD bonding frame adhesives, etc., as well as various films such as UV films and DAF films. The acquisition of 53% of Hengshuo's shares in Warwick will further enrich the company's product matrix and achieve full coverage of major rubber products in the semiconductor packaging field. According to a report on the development status of China's semiconductor support industry, in 2024, the size of China's encapsulating materials market was about 6.69 billion yuan, an increase of 1.98% over the previous year. About 90% of the encapsulating materials are epoxy encapsulants, which corresponds to the size of China's epoxy encapsulants market of about 6.021 billion yuan in 2024. After the completion of this acquisition, it is expected to bring huge potential domestic market space to the company. At the same time, with HySolem's customer relationships, it is expected to drive the company's other products into overseas supply chains.

First coverage, giving a “buy” rating. I am optimistic that the company will achieve a platform-based layout in the field of semiconductor packaging materials and achieve the second curve of performance growth with the epoxy plastic packaging business. The company is expected to achieve revenue of 1.144/1.975/2.284 billion yuan and net profit to mother of 0.103/0.169/0.218 billion yuan in 2024-2026, corresponding EPS of 0.72/1.19/1.54 yuan, respectively.

Risk warning: Valuation and profit forecasts fall short of expectations; downstream demand falls short of expectations; acquisition progress falls short of expectations.