occurrences

On October 24, the company released its report for the third quarter of 2024.

In the first three quarters of 24, the company achieved revenue of 0.749 billion yuan, +15.47% year over year; realized net profit of 0.03 billion yuan, +5.31% year over year; realized net profit of 0.016 billion yuan without return to mother, +123.24% year over year; and gross sales margin of 14.09%.

The company achieved revenue of 0.278 billion yuan in 24Q3, +18.53% year over month; realized net profit of 6.7679 million yuan, -26.58% year on year, -56.01% month on month; realized net profit without return to mother of 3.5059 million yuan, -49.81% year on year and -58.60% month on month; gross sales margin of 13.61%.

On October 11, the company issued an announcement regarding the purchase of assets by important participating subsidiaries. The company's participating subsidiary, Jing Hengxidao, plans to purchase 100% of Heraeus Conamic UKLimited's shares in cash and lay out semiconductor high-purity quartz materials.

Key points of investment

Domestic and foreign business development brings revenue growth, share payments, etc. have a short-term impact on profits. Affected by multiple factors such as macroeconomic growth slowdown, international geopolitical conflicts, and cyclical industry fluctuations in 23, overall demand in the terminal market, represented by consumer electronics, was weak. The semiconductor industry as a whole was at the bottom of the cycle. The company kept a close eye on domestic and foreign markets, actively expanded domestic and foreign business, and achieved operating income of 0.894 billion yuan in 23 (of which the electronic wet chemicals sector/electronic specialty gases and precursors sector achieved revenue of 0.65/0.172 billion yuan, +8.76%/25.44% year over year), and achieved profit The total amount reached 19.4206 million yuan, all of which reached new highs.

In '23, the company achieved net profit of 13.7 million yuan, +30.16% year-on-year; realized net profit of -9.5683 million yuan, mainly due to: 1) Affected by market competition, sales unit prices of some products declined, leading to a decline in gross sales margin. In '23, the company achieved a gross sales margin of 19.95%, -1.72pct year on year. In '23, the gross margin of the company's electronic wet chemicals sector/electronic specialty gas and precursor sector was 19.08%/23.95%, respectively; 2) Revenue generated by some products It is still small, and the scale effect has not been achieved, and the company faces high depreciation pressure; 3) R&D investment continues to increase and the company's operations continue to expand, and management costs have risen. The company's R&D expenses/management expenses in '23 were 63.655/62.6128 million yuan respectively, accounting for 7.12%/7.00% of sales; 4) Combined with 23 years of confirmed share payment fees of 16.3485 million yuan, the company is under short-term pressure on profitability. Benefiting from downstream recovery, etc., the company's revenue increased quarterly in 24 Q1/Q2/Q3, and achieved revenue of 0.234/0.237/0.278 billion yuan respectively.

One-stop service platforms such as electronic wet chemicals+electronic specialty gases+precursor materials can be expected in the future, and market expansion+domestic substitution bring growth opportunities. Since its establishment, the company has focused on electronic chemical materials for integrated circuit manufacturing, and strives to become one of the largest, most comprehensive and high-quality electronic chemical material providers in China, providing customers with one-stop services for electronic wet chemicals, electronic specialty gases and precursor materials. Currently, the company mainly has integrated circuit customers, supplemented by customers such as display panels and photovoltaics. In '23, the revenue share of the company's integrated circuit/display panel/photovoltaic industry was 69.35%/8.61%/10.28%.

1) In terms of electronic wet chemicals: According to data from the China Electronic Materials Industry Association, the global electronic wet chemicals market size (including the three major application areas of semiconductors, display panels, and photovoltaic manufacturing) in '22 was 63.91 billion yuan, +6.64% over the same period last year. According to TECHCET statistics, the global electronic wet chemicals market for semiconductor manufacturing was about 4.2 billion US dollars, +6.7% year over year. Among them, the market size of general electronic wet chemicals/formula chemicals was about 3/1.1 billion US dollars, respectively; the global electronic wet chemicals market is expected to reach 6.9 billion US dollars in '27, and CAGR2023-2027 to reach 6%. According to data from the China Electronic Materials Industry Association, the overall market size of electronic wet chemicals in China was about 17.67 billion yuan in '22, of which the semiconductor/display panel/photovoltaic market was about 5.69/6.4/5.58 billion yuan respectively, and the total demand reached 2.643 million tons. It is estimated that the overall market size of China's electronic wet chemicals market will reach 27.47 billion yuan by 25, and the total demand will increase to 4.605 million tons. The CAGR from 2022 to 2025 is 15.84%, and the growth rate exceeds the global average. Currently, the global electronic wet chemicals market is mainly dominated by European, American and Japanese companies. Chinese companies have continued active research and development over the years. At present, they have achieved a series of technological breakthroughs, and the localization rate is constantly increasing.

2) In terms of electronic specialty gases: According to TECHCET statistics, the global electronic gas market for semiconductor manufacturing is expected to grow from about 6.8 billion US dollars in 22 to about 9 billion US dollars in 26. Among them, the electronic specialty gas market accounts for more than 70%, and deposition, cleaning, etching and doping are the main application areas for electronic specialty gases. The global electronic specialty gas market was 4.8 billion US dollars in '22. Benefiting from advanced logic chips, high-end memory chips, etc., the global electronic specialty gas market is expected to continue to grow rapidly in the next few years. According to SEMI data, China's electronic specialty gas market was 22.08 billion yuan in '22, and is expected to exceed 30 billion yuan in '25, with integrated circuits and devices/display panels/solar and LED accounting for 44.2%/34.7%/21.1%, respectively. As the second-largest material segment after silicon wafers in semiconductor wafer manufacturing materials, electronic gas is currently mainly dominated by European, American and Japanese companies, and the localization rate is low. In recent years, under the continuous impetus of policies and market forces, some domestic products have gradually broken the global oligopoly, and localization is expected to accelerate in the context of autonomy and control.

3) Precursor materials: Precursor materials are the core materials for thin film deposition processes in integrated circuit manufacturing. According to TECHCET statistics, the global precursor market reached 1.582 billion US dollars in '22, up 12% year on year. The overall growth of the industry was strong, mainly due to increased production of advanced process logic devices and an increase in the number of 3D NAND device stacks. The transition from DRAM manufacturing to EUV lithography will also bring opportunities for increased precursor revenue. In the future, with the continuous development of logic and memory chip technology, process nodes continue to shrink, device structures continue to be upgraded, and the number of 3D storage layers continues to increase. ALD-related precursor materials will be used more and more, and the overall market size of precursor materials will continue to grow rapidly.

Innovation drives key investments and continues to consolidate our dominant position. In terms of R&D reserves, a number of major projects such as the 23-year national key research and development plan's 12-inch ultra-high purity hydrofluoric acid project for integrated circuit manufacturing, the Zhejiang Major Science and Technology Research Program's precursor materials project for advanced integrated circuits, and the Quzhou Major Science and Technology Research Plan tungsten hexafluoride key technical research and industrialization project were completed as scheduled. Precursor materials: On the basis of fully understanding customer needs, the company actively promotes the development of precursor materials based on advanced processes and technical node needs. Among them, products such as LA-FMD and TEA have made significant progress. Formulated functional chemicals: The company is committed to overcoming the “difficulties” of localization of key formulation materials and advanced technology nodes in mature process processes. It focuses on developing post-etching cleaning solutions, post-grinding cleaning solutions, silicon oxide etching solutions and silicon etching solutions, and has completed 12 formulation studies. In terms of production capacity investment and construction, during the 24H1 reporting period, the company promoted the construction of fixed investment projects in an orderly manner, and the 0.1007 million tons/year electronic wet chemical capacity expansion and transformation project was progressing normally; electronic grade sulfuric acid at the Qianjiang base began to be officially supplied directly to major customers in central China; overseas market development work progressed further, and client product testing progressed smoothly, and the number of customers supplied further increased.

The participating subsidiary, Jing Heng Xidao, plans to purchase 100% of Heraeus's shares in cash to lay out semiconductor high-purity quartz materials. Heraeus Conamic UK Limited (hereinafter referred to as the “Standard Company”) is a leading global manufacturer of semiconductor high-purity quartz materials, providing products such as natural fused silica and synthetic fused silica to the semiconductor and optical industry on a global scale. Among them, natural fused silica is used in semiconductor monolithic etching equipment due to its high purity and material homogeneity; synthetic fused silica is used in semiconductor wafer manufacturing and other optical applications because of its high purity and excellent optical properties. The target company's products are widely used in various semiconductor etching processes and optical applications. It has rich professional experience in natural fused silica and synthetic fused silica solutions, can provide system solutions for the global semiconductor and optoelectronics industry, and has a strong brand reputation. The target company's revenue for 22/23 was £33,209/18,028 thousand yuan, and the EBITDA was £1,132/-3,489 thousand yuan. Financial data such as the operating income of the target company declined sharply in 23, mainly due to factors such as: 1) The target company's operating income declined due to factors such as the cyclical slump in semiconductor chips and the reduction in orders from downstream customers in the semiconductor industry; 2) Affected by the energy crisis and the increase in upstream raw material prices, the unit cost of the target company increased year by year, and the unit cost increased more than The increase in unit sales price caused the target company's sales scale to drop sharply and manufacturing costs were not diluted, resulting in negative EBITDA. The total assets of the underlying companies at the end of 22/23 were £22,244/£20,067, respectively, and net assets were £14,356/10,566 thousand, respectively. In order to expand the scope of the company's services in the field of semiconductor materials and further enhance the company's ability to provide solutions to customers, the company's shareholding subsidiary Jing Heng Xidao (the company holds 40% shares) plans to purchase 100% of the shares in the target company.

Investment advice

We expect the company to achieve revenue of 1.075/1.347/1.69 billion yuan in 2024/2025/2026, respectively, and achieve net profit of 0.044/0.071/0.111 billion yuan respectively. Profitability will gradually improve, cover for the first time, and give it a “buy” rating.

Risk warning

Technology research and development risk, brain loss risk, customer certification risk, production safety risk, product quality risk, environmental risk, supplier concentration risk, risk of low overall gross margin of the company's main business, risk of fixed asset investment, risk of impairment of goodwill, slow inventory sales and price drop risk, industry risk, and macro-environmental risk.