Incidents:

Kema Technology released its 2024 three-quarter report on October 24: In the first three quarters of 2024, the company achieved revenue of 0.616 billion yuan, an increase of 74.65% over the previous year; realized net profit of 0.226 billion yuan, an increase of 295.42% over the previous year; and realized net profit without deduction of 0.22 billion yuan.

Investment highlights:

Q3 Revenue and net profit to mother increased year-on-year. 2024Q3 achieved revenue of 0.232 billion yuan, a year-on-year increase of 95.11% and a month-on-month increase of 3.48%; realized net profit of 0.087 billion yuan, an increase of 275.56% year-on-year and a decrease of 2.31% month-on-month; and realized net profit without return to mother of 0.084 billion yuan, a decrease of 3.81% month-on-month.

Q3 Gross margin increased significantly year-on-year, and cost control capabilities were significantly optimized. 2024Q3's gross margin was 56.96%, up 11.14 pcts year on year, down 5.85 pcts month on month, net profit margin was 37.42%, up 17.98 pcts year on year, down 2.21 pct month on month. The company's expense ratio for the 2024Q3 period was 15.89%, a year-on-year decrease of 8.76pct, of which sales expenses were 0.005 billion yuan, up 8.95% year on year; management expenses were 0.015 billion yuan, up 46.57% year on year; R&D expenses were 0.016 billion yuan, up 21.63% year on year; and financial expenses were 0.001 billion yuan, down 32.82% year on year.

A domestic leader in advanced ceramic materials, there is broad scope for domestic alternatives in the field of pan-semiconductors. The company now has advanced ceramic material parts, surface treatment services and metal structural parts businesses. (1) Advanced ceramic material parts business. The company is one of the leading domestic advanced ceramic materials and components enterprises. Currently, it has 6 major material systems consisting of aluminum oxide, zirconia, aluminum nitride, silicon carbide, yttrium oxide and iron oxide. The company has now entered the supply chain of world-renowned semiconductor equipment manufacturers such as Company A, and is also a leading domestic semiconductor equipment company such as North China, China Micro, and Tuojing Technology A stable and in-depth cooperative relationship has been established. The company's advanced ceramic products are also used in batches in other pan-semiconductor equipment fields such as display panels, LEDs, and photovoltaics. At the same time, it actively lays out rich application fields such as automobiles, chemical environmental protection, medical devices, biomedicine, textiles, and paper, and future growth can be expected. (2) Surface treatment business. The company continues to promote cooperation with Company A in CVD equipment surface treatment services in the field of display panels, while actively expanding to semiconductor surface treatment. (3) Metal structural parts business. The company's products mainly include upper electrodes and wall panels, which are used in display panel production equipment. The company is one of a small number of domestic enterprises that produce new upper electrode products in addition to the original equipment manufacturer.

Profit forecast and investment ratings We expect the company to achieve revenue of 0.802, 1.042, and 1.249 billion yuan in 2024-2026, and achieve net profit of 0.293, 0.391, and 0.468 billion yuan, corresponding to the current price of PE, respectively. The company is a leader in advanced domestic ceramic materials, has broad domestic replacement space in the pan-semiconductor field, and is actively enriching application areas. Future growth can be expected. Coverage for the first time will give it a “buy” rating.

Risks suggest that the recovery of the semiconductor and display panel industry falls short of expectations; the progress of new product development falls short of expectations; the risk of domestic substitution falling short of expectations; the risk of domestic substitution falling short of expectations; increased industry competition; the risk of dependence on imports of some raw materials; the risk of high R&D investment not being converted into revenue in a timely manner; and the risk of falling gross margin.