South China market: scale business in IC packaging and testing Chippacking has been in the business for more than 10 years and focuses on integrated circuits (IC) packaging and testing. It is one of the largest domestic-funded integrated circuit packaging and testing companies in terms of production and sales. Its advanced technology is offered in a comprehensive product matrix. Its core competitive advantages include stable quality and cost-effectiveness. It is stepping up R&D investment based on its technological foundation while building a position in advanced packaging. With product structure upgrades, its main revenue streams are stable. Upstream boom, diverse downstream applications, advanced packaging foray Three factors are driving the rapid development of China's packaging and testing market: 1)Upstream: The increase in IC localization is driving demand for packaging and testing. Various international events have raised consumer awareness of the importance of chip localization. The semiconductor industry is entering a third phase of global capacity transfer with China as the main area of expansion. The construction of China fabs is reaching a peak, which we expect to drive growth in the downstream packaging and testing market. 2) Downstream: New applications continue to come into the market and this maintains the growth momentum. The rapid development of 5G, smart cars, artificial intelligence (AI), Internet of Things (IOT) and other industries carves out new market potential in the semiconductor industry. We expect the global semiconductor industry to enter a new growth cycle. 3) Advanced packaging: the importance of packaging technology innovations has increased. Demand for miniaturization and low energy consumption in the downstream market has emerged and demand for chip packaging skills continues to increase. With the advent of the post-Moore era, packaging innovations have become crucial. Tech structure: traditional packaging advantages; advanced packaging Chippacking’s technology know-how in traditional packaging is similar to those of industry leaders, giving it a competitive advantage. It is stepping up its game in advanced packaging technology, which accounted for 24.60% of core revenue in 1H21. According to Yole forecasts, the traditional packaging market will continue to grow as there is growth headroom, while the advanced packaging market has enormous growth potential and is set to become a hot market. The company's existing R&D and pipeline packaging technologies are in line with future development trends in the packaging and testing market, in our view. Chippacking has the following three advantages: 1) as a domestic IC packaging and testing leader, it has high-quality R&D based on a technical foundation, and has built up a production and quality management system that has narrowed the domestic-overseas gap between advanced packaging and tier-one manufacturers. This augurs well for its market position potential. 2) Its core technology advantages in traditional packaging help the company to grasp development opportunities in terms of domestic substitution and branded customer expansion in traditional packaging products. 3) It is actively deploying advanced packaging technologies, including 5G, MIMO base stations, GaN microwave radio frequency power amplifier plastic packaging technology, CPC, CDFN/CQFN packaging and FC packaging technology, which help Chinese leaders to narrow the technological gap with global leaders. Valuation and risks We expect net profit of RMB137m/167m/215m and EPS of RMB1.29/1.57/2.02 in 2021/22/23E. Relative to its packaging and testing peers, we set a corresponding PE of 40x in 2022E. We initiate coverage with a BUY rating and a target price of RMB63. Risks include: weak competitiveness in the advanced packaging business; iterative tech risks related to product upgrades in IC circuit packaging and testing; the risk of its independent defined packaging forms cannot be recognized by the market; the risk of increased market competition; industry fluctuations and demand changes risk; raw material price fluctuation risk; sales area concentration risk. * Note: The investment ratings given by TFI Asset Management Limited may have taken reference to the research report previously issued by other entities of the TF Group. For details, please contact us at research_tfi@tfisec.com. | 