After reporting a slowdown in revenue and profit growth in 2019, Taiji reported a revenue of 3.76 billion yuan in the first quarter of 2020, with a month-on-month and year-on-year decline of 16 per cent, 1 per cent, 11.1 per cent gross profit margin and 4.0 per cent operating profit margin close to the same period last year. Diluted earnings per share reached CNY$0.051, up 12 per cent from a year earlier and accounting for 15 per cent of our forecast diluted earnings per share for the full year.

Year-on-year deceleration in 2019: affected by poor global memory demand in 2019, Taiji reported year-on-year revenue growth of 8% in 2019. Although it was higher than the company's expectations and much better than the 13% year-on-year recession of global semiconductors, the slowdown was significant and could not increase interest rates, so earnings per share grew by only 9%.

There will also be headwinds in 2020: although Haitai and Taiji semiconductors (30 per cent of revenue) can easily grow by more than 10 points due to memory uplink cycle growth, the engineering package and design that accounts for 70 per cent of revenue due to COVID-19 's impact on plant construction progress and existing orders are significantly reduced by more than 20 per cent compared with last year, which is estimated to decline year-on-year, resulting in zero revenue growth (1Q20 decline 1 per cent). However, the product portfolio is biased towards photovoltaic power generation and memory closure tests with higher gross margins, which may lead to a slight rebound in profit rates, so profits can increase by 12% compared with the same period last year.

Future growth momentum: due to the rebound in demand for servers, laptops and game consoles, we are optimistic about the DRAM/3D NAND memory industry, but next year a large number of global 5G mobile phone shipments (3.0-350 million units) and AI server demand will continue, coupled with Yangtze River Storage, Hefei Changxin, Ziguang Chongqing / Storage's production expansion plan in the next five years, which is conducive to Taiji's memory closure and testing business.

Investment suggestion

Due to COVID-19 's epidemic, which delayed the construction of the plant and reduced the number of orders on hand, the company's profit forecast for 2020 and 2021 was lowered to 690 million yuan (- 10%) and 1 billion yuan (- 8%). Although the profit growth of Taiji has slowed down in the past two years, the compound profit growth rate in the next five years will reach 22%. In the past three years, the high-and low-grade EPS E is 27x and 14x. Based on the average EPS multiplied by the high-and low-end Pmax E in the next two years, we estimate that the high-and low-end stock price of Taiji will be 15 yuan and 8 yuan this year, and 18 yuan and 10 yuan next year, so we will raise the target price from CNY$11.7 to CNY$15 (there is still 48% room to rise).

Risk hint

Customers focus on high operating risk, the risk of memory downcycle to cash cost price, the risk of inflexible management mechanism of state-owned enterprises, and the performance risk caused by weak follow-up orders in clean room engineering and design business.