DDIC foundry leader, characteristic process epitaxial growth space. The company is one of the top nine in the world and the third largest in mainland China. It is a global leader in LCD panel foundry, and has chip foundry capabilities such as CIS, PMIC, MCU, and Logic. The 24H1 industry boom picked up. The company's revenue was 4.398 billion yuan/yoy +48.09%, and net profit to mother was 0.187 billion yuan/yoy+0.231 billion yuan, turning a loss into a profit. With the optimization of the product structure, CIS has become the company's second-largest product spindle. 24H1, the company's DDIC and CIS accounted for 68.53% and 16.04% of revenue, respectively.

DDIC: A key component of display panels, rich downstream application scenarios. According to display technology, DDIC can be mainly used in LCD panels and OLED panels; according to application scenarios, DDIC application terminals include TVs, displays, laptops, smart phones, smart wearables, etc. According to Omdia, in 2022, large DDIC accounted for 69%, and small to medium DDIC accounted for 31%, of which smartphones accounted for about 18%.

Investment logic 1 #：LCD The transfer of the industry has become a foregone conclusion, and the supporting DDIC industry chain has benefited deeply. Statista predicts that mainland China will account for 69% of the global LCD panel production capacity by 2025, and the supporting local industrial chain has accelerated construction. Currently, DDIC is still dominated by overseas manufacturers. Designers in mainland China have achieved breakthroughs in large-scale DDIC. According to Omdia, local manufacturers accounted for 18.9% of the global market share in 23Q2. DDIC is deeply bound upstream and downstream or is a necessary condition for industrial development. The company has the dual advantages of “scarce foundry standards+close to the Hefei 'core screen gas' industrial cluster”, which is expected to benefit deeply.

Investment logic 2 #：中国OLED shipments have peaked, and the company's process upgrades are waiting to blossom. According to Omdia, the global OLED smartphone penetration rate reached 51% in 2023, and OLED applications are becoming more widespread; in 24Q1, Chinese panel manufacturer's OLED shipments surpassed South Korea for the first time, ranking first in the world with a 49.7% share. OLED DDIC has plenty of potential and is expected to become the main growth point for DDIC. According to Omdia, the total share of Chinese designers in the global OLED DDIC market reached 8% in 24Q1. The company actively lays out in the field of OLED foundry. 24H1 40nm high-voltage OLED DDIC has achieved small-batch production, and 28nm OLED DDIC research and development is progressing steadily.

Investment logic 3 The volume price of #：DDIC may have bottomed out, and the company's production capacity has been at full capacity since March '24. According to Qunzhi Consulting, DDIC shipments are expected to bottom up in 2024, and the overall decline in DDIC prices will narrow. At the same time, the number of inventory turnover days for major DDIC designers is already at a healthy level, and profitability has recovered moderately. According to the “Science and Technology Innovation Board Daily”, the company's production capacity was already at full capacity from March to June '24, and the production line load in June was about 110%. In 2024, the company expects to accelerate the expansion of production capacity around 55nm and 40nm products, and plans to increase production by 0.03-0.05 million pieces/month. If production expansion goes well, we expect the company's annual production capacity to reach 1.485 million tablets by the end of '24.

CIS: In-depth cooperation with Startech to catalyze the second product spindle with strong supply and demand. CIS is the core component of camera modules. Downstream demand is extensive. The CIS smartphone market is the largest, and the CIS for automotive electronics is growing rapidly. The company cooperated deeply with local CIS manufacturer Stevio. In August 2024, the two sides jointly launched a 0.18 billion pixel full-frame CIS chip to push full-frame CIS into a new stage of development. 24H1 achieved 55nm BSI mass production, and the product pixel reached 50MP. The company plans to expand production by 0.03-0.05 million pieces/month in '24, with advanced CIS as the main direction.

Investment advice: We expect the company's 2024/2025/2026 revenue of 9.476/12.822/15.327 billion yuan, and net profit to mother of 0.643/1.321/1.719 billion yuan. Considering the company's leading position in DDIC foundry, and along with the growth opportunities brought about by process upgrades and CIS breakthroughs, coverage was given to the company for the first time, giving the company a “buy” rating.

Risk warning: macroeconomic recovery falls short of expectations; risk of technological iteration; increased risk of competition