Core views

The company continues to expand its products around pan-semiconductor and biomedical customers, from process media systems and MRO to GAS BOX, gas, advanced materials, etc., and from CAPEX to OPEX business, building a multi-domain business layout strategy.

From a product perspective, thanks to the early downstream expansion of pan-semiconductors, the company still mainly focuses on the CAPEX business, and its medium- to long-term goals are equally divided between OPEX and CAPEX businesses. From a downstream perspective, semiconductors surpassed photovoltaics to become the largest downstream in 2023, and the downstream structure is expected to continue to improve. We believe the company is expected to continue to grow at a high level of growth, improve cash flow, and increase profitability.

summary

Building a multi-grid business layout. At this stage, semiconductors are already the largest downstream from a product perspective. At the beginning of its establishment, the company focused on high-purity process media systems, and promoted horizontal expansion to key components, as well as vertical expansion of front-end gases, advanced materials, and back-end maintenance services. Whether horizontal or vertical, the business expansion revolved around same-origin customers. At present, the company has formed a trinity position of system equipment, gas and advanced materials, and maintenance services. Among them, the system equipment business is related to customer CAPEX, and the gas materials and service business is related to customer OPEX.

Looking at the application field, the company has experienced everything from flat panel displays to photovoltaics, to the current downstream composition of semiconductors. In 2023, the company's semiconductors and photovoltaics accounted for 38.46% and 37.60% of the downstream revenue, respectively. From an order perspective, semiconductors account for 50% of the new contracts signed by 2024H1, and photovoltaics are expected to account for 20%-30%. It is expected that semiconductors will be the company's largest downstream for a long time to come. The company's multi-sector layout can calm the adverse effects of fluctuations in the downstream boom and provide a guarantee for continued rapid growth.

Benefiting from the boom in downstream fixed asset investment, the company's revenue/net profit has maintained rapid growth.

In 2017-2023, the company's revenue CAGR reached 32.55%. Rapid growth in fixed asset investment from downstream customers led to high revenue growth in the main business process medium supply system; improved cost control levels combined with improvements in the superposition revenue structure led to an increase in the company's gross margin; and the company's cost structure continued to be optimized under the scale effect. Benefiting from rising gross margin, the company's profit margin increased steadily. In 2017-2023, the company's profit margin increased from 4.05% to 11.04%, and the compound growth rate of net profit to mother reached 53.64% during the same period.

The CAPEX business continues to optimize the market position and product structure of electronic process equipment The CAPEX business is still the main source of revenue for the company, with electronic process equipment as the main source of revenue. Thanks to the boom in fixed asset investment in the semiconductor industry such as semiconductors and photovoltaics in the early stages, the company has mainly focused on the CAPEX business until now, accounting for about 80% of revenue in 2023. Among them, electronic process equipment is the main focus. In 2021-2023, the company's electronic process equipment revenue increased from 1.283 billion yuan to 2.9 billion yuan, the CAGR reached 50.34%, and the share of total revenue increased from 69.88% to 75.63%. Electronic process equipment includes two major categories: process medium systems and gas boxes. The former has increasingly improved its position in the industry, while the latter has become the fastest growth point for electronic process equipment.

The company's market position in process medium systems in electronic equipment is increasing. Process medium systems are mainly used in the semiconductor and photovoltaic fields, and the domestic market size in 2024 is about 13.9-22.3 billion yuan. In terms of the competitive landscape, overseas suppliers occupy the vast majority of the domestic market share. As the localization of the industrial chain continues to advance, domestic customers are more willing to give domestic suppliers equal opportunities to compete compared to foreign companies. Therefore, in recent years, their share in the top two domestic markets has continued to rise, increasing by 6.65pct from 18.29% to 24.94% in 2018-2023. Among them, the domestic market share of Zhengfan Technology has increased from 7.94% to 14.28%, an increase of 6.34pct. The company continues to gain more market share in the domestic production substitution process and has strong customers Approval level and ability to take orders.

The company's core component, GAS BOX, started quickly and became a new growth point for the CAPEX business. GAS BOX is a modular gas supply system on the semiconductor dry process equipment side. In 2023, the mainland China market size was about 1.019 billion US dollars, and demand is growing faster than the global market. The localization rate of semiconductor-grade GAS BOX is low. The company and Fortune Precision etc. are major domestic suppliers to cooperate with domestic equipment companies to develop and produce to maintain supply chain security. In 2021, the company established Hongge Semiconductor Equipment (Shanghai) Co., Ltd. to expand GAS BOX and other businesses. Currently, it has delivered batch supplies to leading domestic machine equipment customers. The revenue growth rate in 2023 was as high as 104.48%, far exceeding the overall growth rate of electronic process equipment, and has become a new growth point for the CAPEX business. It is expected that the continued increase in the share of high-margin components will drive improvements in the profitability of the CAPEX business. Furthermore, the company continues to develop equipment customers, and the prospects for parts to go overseas can be expected.

OPEX business is ready to go, gas and precursor volumes are imminent

OPEX has a high degree of overlap with CAPEX business customers, which is conducive to rapid business expansion. The company's OPEX business includes gas, advanced materials, MRO, etc., and is relatively small in the early stages, but it relies on the process medium supply system to obtain stickiness and recognition from same-origin customers, and can have a first-mover advantage in subsequent business competition. In the future, with the company's gas production capacity investment, precursor and original MRO business volume, the OPEX business will be equally divided with the CAPEX business. With the optimization of the product structure, the OPEX business will support the company's subsequent high growth, improve cash flow, and profitability will benefit from an increase in the share of the precursor business.

Electronic gas: Expand bulk gas based on specialty gas and build a platform-based gas supplier. Benefiting from strong downstream demand for semiconductors, the domestic electronic gas market is rapidly increasing in size. The market is mainly dominated by overseas manufacturers, and there is broad scope for domestic alternatives. The company uses the existing electronic special gas business as an entry point to enrich specialty gas categories, expand the bulk gas business, build a “two-wheel drive” gas business layout, and cultivate comprehensive service capabilities. In the context of new construction projects being implemented one after another, the company's gas business is about to expand, and it is expected that the share of gas-based OPEX business in revenue will increase rapidly.

Advanced materials: The high-margin precursor business is moving towards mass production, and the OPEX category is expanding to the next level. As technology in the global chip industry develops to more advanced manufacturing processes, laminated film deposition technology will be widely used to drive the precursor market to continue to grow. China's semiconductor precursor materials market size is about 0.71 billion US dollars in 2023, and is expected to grow to 1.157 billion US dollars in 2028, with a CAGR of 10.26%. The market is basically monopolized by foreign companies, and the industry is in urgent need of localization. The company's Tongling Phase II project will be launched in 2024 to expand its own production capacity for precursors, moving from trade sales to self-development and self-production. Furthermore, the gross margin of the precursor business is high, and it is expected to drive the company's OPEX business profitability upward after launch.

Investment advice

The company's 2024-2026 revenue is expected to be 5.529, 7.602, and 10.081 billion yuan, respectively, up 44.18%, 37.50%, and 32.61% year-on-year, and 2024-2026 net profit to mother is 0.548, 0.798, and 1.156 billion yuan, respectively, up 36.56%, 45.59%, and 44.93% year-on-year respectively, corresponding to 2024-2026 PE valuations of 17.38x, 11.94x, and 8.24x, respectively. Maintain a “buy” rating.

Risk warning

1) Downstream production expansion falls short of expectations; 2) New product development and capacity expansion fall short of expectations; 3) Risk of technological innovation; 4) Risk of continuing supply chain tension; 5) Risk of changes in fair value of equity investment.