Key points of investment

Revenue and profit continued to reach record highs. The Q4 performance outlook continued to improve, thanks to the continuous increase in production capacity, including the continuous intake of high-end test platforms and the increase in production capacity of the post-COF process, and continuous optimization of the product structure. 23Q3 achieved revenue of 338 million yuan, an increase of 43.20% over the previous year, an increase of 7.07% over the previous year; net profit of 60 million yuan, an increase of 20.52% over the previous year, an increase of 7.70% over the previous year; net profit of 54 million yuan, an increase of 66.39% over the previous year, an increase of 17.98% over the previous year; revenue, net profit, and The three non-return net profit indicators successfully rebounded after bottoming out in 23Q1, and continued to set new records in 23Q3 after 23Q2 reached a record high. 23Q3 gross profit margin was 29.17%, up 2.44pcts month on month; net profit margin was 17.75%, up 0.10pct month on month. 23Q3 R&D investment totaled RMB 19735 million, an increase of 46.25% over the previous year, accounting for 5.85% of revenue, mainly due to the increase in amortization of equity incentive expenses for R&D personnel.

Looking ahead to Q4, according to the November 2023 investor survey minutes, the company said that the 23Q4 advanced test platform continues to gain momentum, and there is some room for improvement in the production capacity of post-process processes such as COF, which has led to an increase in the production capacity of some processes with relatively high gross margin levels; in addition, the company continues to optimize the product structure, and the gross margin for the Q4 quarter is expected to increase slightly month-on-month. Furthermore, judging from the current on-going orders and the utilization rate of upstream fabs, the company expects Q4 to maintain a high operating rate.

Build full-process packaging and testing capabilities for display driver chips, and pioneer the deployment of high-end advanced packaging technology companies such as Fan-out, focusing on the field of display driver chips. Previously, gold bump manufacturing (Gold bumps) was the core, and integrated wafer testing (CP) and post-stage glass coating (COG) and thin film coating (COF) links to form a comprehensive service capability for the full-process packaging testing of display driver chips. The company is one of the first advanced packaging and testing companies for display driver chips in mainland China to introduce a 12-inch wafer gold bump production line and achieve mass production. It has full-process packaging and testing capabilities for 8/12 inch wafers. In addition to display driver chips, the company continues to expand the application fields of packaging and testing chips, and continues to invest in R&D in more segmented application fields such as new displays and automotive chips. At the same time, the company continues to expand technical boundaries based on leading bump manufacturing (bumps) and flip packaging technology (FC), and lays out high-end advanced packaging technologies such as Fan-out, 2.5D/3D, and SiP based on customer needs, laying a solid foundation for breaking through industry technology bottlenecks.

Increased penetration rate of OLED screens drives demand, and active expansion of production to seize market share. With consumption upgrades and technological progress, consumer electronics products have shown a trend of thinner and lighter products, and consumers are also more fond of electronic products with thin and light designs. Since OLED displays have the advantages of low energy consumption, good luminance, high brightness, and thinness, they are more and more widely used in terminal devices. With the rapid increase in the penetration rate of OLED screens, the demand for OLED display driver chips is also growing rapidly. According to Frost & Sullivan data, global OLED display driver chip shipments in 2025 are expected to be 2.45 billion units, with a compound growth rate of 13.24% from 2020 to 2025; of these, mainland China's OLED display driver chip shipments are expected to reach 780 million units in 2025, and the compound growth rate from 2020 to 2025 will reach 23.64%, and the growth rate is faster than the global growth rate.

Since the company introduced the OLED display driver chip packaging and testing business in 2021, the share of this business has gradually increased. From 2021 to the first half of 2023, the revenue of the company's OLED display driver chip packaging and testing business accounted for 5.75%, 3.37% and 9.04% of main business revenue, respectively. As of the end of August 2023, the amount of orders in progress for the company's OLED display driver chip packaging and testing was 6.2722 million yuan, accounting for 13.24%, a further increase of 9.04% of the revenue of the OLED display driver chip packaging business from January to June 2023.

According to the November 2023 announcement, the company plans to raise 1,149 billion yuan to expand wafer packaging and testing capacity for new display driver chips such as 12-inch OLEDs. The wafer process for sealed testing is generally 28-40nm. Among them, the 12-inch advanced process new display driver chip wafer gold bump manufacturing and wafer testing capacity expansion project plans to use capital of 350 million yuan to increase the annual production capacity of gold bump manufacturing and wafer testing after delivery to 240,000 pieces and 54,000 wafer testing, respectively. The 12-inch advanced display driver chip wafer testing and crystal-coated packaging capacity expansion project plans to use 500 million yuan in capital to reach the post-delivery company's production capacity of 68,400 million wafers, 204 million glass-coated packages, and 96 million thin-film crystallized packages every year. Overall, after delivery, the two projects reached the estimated production capacity of 8-inch gold bumps, an annual production capacity of 624,000 pieces of 12-inch gold bumps, an annual production capacity of 2,624,000 wafers, and an annual wafer testing capacity of 2,628 million hours (657 million wafers can be tested per year based on the 0.25 hours of test time per wafer), COG's annual production capacity is 1,428 million pieces, and COF annual production capacity is 540 million pieces. Furthermore, the project is expected to increase annual revenue by 508 million yuan after delivery.

Investment suggestions: We expect that in 2023-2025, the company's revenue will be 11.60/14.40/1,780 billion yuan, 23.4%/24.2%/23.6%, respectively, and net profit of 1.93/2.65/342 billion yuan respectively, 9.2%/37.1%/29.0% of the previous year; PE is 48.5/35.4/27.4 respectively. In view of the fact that Huicheng Co., Ltd. has formed a comprehensive service capability for the full-process packaging and testing of display driver chips, production capacity for projects under construction is gradually being released, taking the lead in seizing the market share of OLED display drivers, and there is plenty of growth momentum. First coverage, giving a “buy” rating.

Risk warning: Downstream terminal market demand falls short of expectations, risk of new technology, new process, and new products not being industrialized as scheduled, risk of increased market competition, risk of increased market competition, risk of fund-raising projects falling short of expected benefits, systemic risks, etc.