Event: The company released its second-quarter results, with revenue of 8.2 billion yuan, an increase of 9% over the previous month and an increase of 8% over the previous year. However, on the profit side, as the upstream recovery was slower than expected, product prices were under pressure, and gross profit margin (down 1.6 percentage points from the previous month) and operating profit both declined.
The bottom of the CCL industry is already here: benefiting from the recovery in the operating rate of PCB manufacturers, the revenue side of domestic CCL manufacturers (such as Shengyi Technology, South China New Materials, etc.) all picked up in the second quarter. Also, according to our market research, industry-side product prices have gradually stabilized, and the inventory level of upstream PCB manufacturers has dropped to 1-2 weeks (normal inventory is 1-2 months). We believe that the month-on-month recovery in terminal demand in the third quarter will drive the operating rate of PCB manufacturers to continue to rise, while CCL is also expected to enter a replenishment cycle, driving a rebound in revenue and profitability.
AI drives industry growth, CCL structure upgrade: The explosion in AI demand will significantly drive demand for high-speed CCL. 1) The main increase in PCB/CCL usage for AI servers comes from GPU boards. Take DGXA100 as an example. The total area of OAM+UBB PCBs is about 0.6 square meters, using Ultra low loss level CCL; 2) AI servers will drive 400G switch/optical module demand, and CCL specifications will shift from M6 to M7/M8, driving the CCL volume and price rise sharply. On the other hand, AI server CCL suppliers are mainly overseas and Taiwan-funded. Among them, Taipower has a market share of about 60% in the AI server field, and the company is expected to gain a certain market share. According to the interim report, the company's Ultra Low Loss CCL products have entered the small-batch stage of digital communication 56 Gbps switches. It is accelerating the development of new sequence products in the fields of 400G optical modules and high-end AI servers, and is actively promoting certification of multiple terminals. In the future, along with the volume of high-margin high-speed CCL products, the company's overall gross margin will also increase.
CBF materials have achieved a phased breakthrough: As a key upstream packaging raw material for domestic computing chips, the company's CBF products are expected to break the monopoly of Japanese merchants and ensure the advancement of the localization process. At present, the company's products have been verified by important end customers and downstream customers in application scenarios such as ECP and FC-BGA, and have achieved good results in stages. According to our supply chain research, the company's products are ahead of the certification process compared to friends and merchants, and it is expected to gain a major market share in the domestic market in the future.
Valuation and suggestions: Currently, the valuation of comparable domestic semiconductor materials companies in 2024 is about 30x-50x, while CCL companies are about 10-15x. We think 20x 2024PE is a reasonable valuation for the company. We expect the company's net profit for 2023/2024 to be -0.01/306 million yuan (previous forecast was 0.55/366 million yuan), corresponding to a target price of 43 yuan (original target price of 52 yuan, 20x 2024PE, -17%), maintaining a superior market rating.
Risks: 1) New product promotion falls short of expectations; 2) Competition intensifies; 3) Continued rise in copper prices impacts profitability; 4) Production capacity release falls short of expectations.