Key points of investment:

Changhong Convertible Bonds (123109.SZ):

AA-, with a bond balance of 0.46 billion yuan, accounting for 99.9% of the total issuance amount, with a remaining term of 2.44 years. The closing price on October 24 was $114.7, with a conversion premium of 52.12%, pure debt premium of 4.39%, and YTM 1.55%.

Original stock: Changhong Technology (300151.SZ):

The company currently has a total market value of 11.1 billion yuan. It has focused on non-metallic precision mold manufacturing for 24 years, leading the industry in design and manufacturing. Its products cover the three core fields of office automation equipment, medical devices and consumables, and semiconductor wafer carriers. The company predicts a year-on-year increase of 48.42% to 54.36% in 1-3Q net profit.

The main highlights of Changhong's debt conversion:

Precision mold injection molding leader, high technical threshold: The company has focused on precision molds and supporting injection molding products for many years, mastered many key core technologies and related processes, and won the market in industry competition with a fast and complete customer service mechanism that significantly reduces costs and increases efficiency. By the end of H124, the company had 47 registered trademarks and 167 patents authorized.

Champion enterprise in the field of medical polymer consumables: Since 2020, the company has vigorously developed the medical consumables business, forming a double barrier between technology and customers with the competitive advantage of underlying mold technology and “one-stop service”.

In November 2021, it became the only deep cooperative supplier outside of Europe for international medical consumables giant Roche Diagnostics. By the end of H124, it had entered the supply chain system of 19 world-renowned medical customers including Mindray, Thermo Fisher, and Siemens. H124's medical device business accounts for 29.80% of revenue.

The semiconductor high-end wafer carrier business is about to explode: wafer carriers are important transportation and storage throughout the semiconductor industry chain. Production technology is difficult and the capital threshold is high. Currently, they are almost monopolized by overseas companies. Changhong cooperated with Dinglong Co., Ltd. to quickly enter the middle and high-end wafer carrier market. At present, many products have entered the “small batch and verification” stage of mainstream domestic fabs, which is expected to open up a new growth curve in the semiconductor consumables field.

The absolute price is low, YTM is positive, and the balance of debt conversion is small, and the remaining period is short. Although Changhong's debt-to-equity premium rate is high, the price is definitely not high. At the same time, the original stock has mastered the core technology, and the performance is about to explode.

Reasonable valuation derivation for debt conversion

Based on the valuation model of Mountain Securities Convertible Bonds, assuming that the underlying stock price does not change and forcible foreclosures are not taken into account, we believe that the reasonable valuation of Changhong Convertible Bonds is 125-130 yuan.

Risk warning: industry policy changes, increased market competition, new business falling short of expectations, exchange risk, etc.