Key points of investment

Multiple measures promote development in parallel, 23Q3 performance increased year on year

The company actively explores product markets, accelerates technological innovation, and continues to carry out process improvement and cost control work. 23Q3 performance achieved high year-on-year growth. 23Q3 The company achieved revenue of 1,477 billion yuan, a year-on-year increase of 39.30%, a year-on-month increase of 2.54%; net profit of 411 million yuan, a year-on-year increase of 35.44%, a decrease of 0.05%; a net profit margin of 309 million yuan, a year-on-year increase of 32.44%, a year-on-year decrease of 6.18%; a gross profit ratio of 39.88%, a year-on-year increase of 1.06pct, a decrease of 0.11pct over the previous month; and a net profit ratio of 27.87%, a year-on-year decrease of 0.79pct, a decrease of 0.70pct over the previous month. 23Q3's quarterly R&D expenses were 156 million yuan, up 56.80% year on year and 25.30% month on month.

MLCC: Localized supply is imperative. Breaking through super high performance is unstoppable. Sanhuan Group focuses on R&D, production and sales of electronic components and their basic materials. The main products include electronic components and materials, semiconductor components, communication components, etc., which can be widely used in electronics, communications, consumer electronics, industrial electronic equipment and new energy fields. Among them, the production and sales volume of products such as ceramic ferrules for optical communication, alumina ceramic substrates for chip resistors, and semiconductor ceramic packaging bases all rank among the highest in the world.

With the rapid development of industries such as 5G, smart phones, the Internet of Things, and automobiles, the demand for electronic components is growing rapidly. Among them, MLCC is one of the most used and fastest growing basic components in the world. According to data from the China Electronic Components Industry Association, the global MLCC market in 2022 was about 120.4 billion yuan, of which the Chinese market reached 59.6 billion yuan. In terms of the competitive landscape, according to data from the China Electronic Components Industry Association, Japanese companies had the highest market share in 2021, reaching 54%, and mainland Chinese MLCC manufacturers accounted for about 7% of the global market share. In recent years, China's MLCC import and export volume has increased year by year, but the import volume has been higher than the export volume for a long time, and the margin is increasing year by year. According to data from the General Administration of Customs, in the first ten months of 2023, China's MLCC net import volume reached 854.6 billion units, up from 712.6 billion units in the same period last year, reflecting China's high dependence on imports of MLCC products and broad scope for domestic substitution. Judging from the product structure, imported MLCCs are mainly high performance, and exported MLCCs are concentrated in the middle and low end fields. While reflecting the high demand for high-performance MLCCs in the domestic market, it also reveals the market potential of the local MLCC industry that has yet to be developed in terms of high performance and high capacity products.

In order to solve industry pain points such as stress fracture and noise, Sanhuan Group has continuously increased its investment in MLCC technology research and development innovation and production capacity expansion. It has now launched four major product lines: high capacity high pressure, high strength N, high strength C, and high frequency.

1) High capacity high voltage series: The product breaks through the high dielectric constant of the material, more laminates, and the thickness of the medium layer and electrode layer is thinner, making it suitable for fields with high cost and size requirements. 2) High-strength N series: By optimizing the internal lamination design, the product realizes a new interlaced lamination structure design with equal parts of the printed electrode, effectively improving the product's ability to withstand mechanical stress fracture and bending performance. 3) High-strength C series: The excellent ductility of the product can cushion external shocks and is suitable for situations where poor mechanical stress is prone to the risk of fracture. 4) High frequency series: The product uses copper electrodes instead of nickel electrodes, which allows the product to show the characteristics of low ESR and high Q in the high frequency state, suitable for circuits with low loss and high application bandwidth requirements.

In the field of high-capacity MLCC, Sanhuan Group's MLCC products have completed a leap from a single layer of 5 μm film thickness to 1 μm film thickness, a breakthrough in the number of stacked layers reaching 1000 layers, and large-scale mass production of high-capacity products of 0201 and above, and has taken the lead in mass application by leading companies in various terminal application fields. Looking forward to the future, the company will strive to achieve the development and mass production of the 0805-100μF, 1206-220μF medium and high-capacity specifications, and 01005-0603, etc., and is expected to achieve the goal of expanding the annual production of the high-capacity series by hundreds of billions of units by 2025.

New energy: Mastering the mass production capacity of the entire SOFC/SOEC technology chain, the 210KW power generation system passed the inspection, and under the guidance of the dual carbon target, SOFC/SOEC technology has achieved rapid development as an important fuel cell/hydrogen energy technology. After nearly 20 years of continuous investment and technical research, Sanhuan Group has now become one of the core links in the global SOFC/SOEC industry chain. It has mastered the R&D and mass production capabilities of the entire SOFC/SOEC technology chain from materials, single batteries, electric stacks, and systems. It has more than 50 core patents, pioneered the launch of the first 35kW and 50kW high-power SOFC power generation systems in China, and is committed to the “13th Five-Year Plan” and “14th Five-Year Plan” national key research and development plans. It is committed to the efficient use of renewable energy in the “carbon peak and carbon neutrality” process, providing safety and reliability New energy technology replacement support.

In January 2023, the “210kW High Temperature Fuel Cell Power Generation System R&D and Application Demonstration Project” carried out by the company successfully passed the inspection. The development of this fuel cell power generation system has run through the entire technological chain, successfully innovating the first demonstration application of a 100 kilowatt ceramic fuel cell power generation system in China. The installed capacity has exceeded 210 kW, the net efficiency of alternating current generation is as high as 64.1%, the comprehensive efficiency of cogeneration has reached 91.2%, and the technical indicators have reached the international advanced level.

Investment suggestions: We expect that in 2023-2025, the company's revenue will be 56.22/71.28/8.930 billion yuan, 9.2%/26.8%/25.3%, respectively, net profit of 15.55/20.48/2,585 billion yuan, 3.3%/31.7%/26.2%, respectively; PE is 35.7/27.1/21.5. Sanhuan Group continues to increase investment in MLCC technology research and development innovation and capacity expansion, seizing the new opportunities brought by MLCC localization and high-end, and is expected to achieve the target of expanding the high-capacity series by hundreds of billion units per year by 2025. In the field of new energy, the company has successfully mastered the R&D and mass production capacity of the entire SOFC/SOEC technology chain, and has sufficient growth momentum under the guidance of the dual carbon target.

First coverage, giving a “buy” rating.

Risk warning: the risk that demand in the downstream terminal market falls short of expectations, the risk that new technology, new processes, and new products will not be industrialized as scheduled, the risk that market competition will intensify, the risk that production capacity expansion will fall short of expectations, systemic risks, etc.