Matters:
The company released its 2023 annual report. In 2023, it achieved revenue of 1,212 billion yuan, yoy +1.4%; realized net profit of 167 million yuan, yoy +213.41%; deducted non-net profit of 123 million yuan, yo +10.27%; and gross sales margin of 35.16%. 2023 profit distribution plan: A cash dividend of 2 yuan (tax included) will be distributed for every 10 shares.
Ping An's point of view:
The semiconductor industry as a whole was under pressure in 2023, and the company's diversified semiconductor materials layout and revenue still maintained positive growth of more than 20%. The SIA report predicts an 8.2% year-on-year decline in global semiconductor industry sales in 2023, and a 14.0% year-on-year decline in China. The company actively lays out high-barrier materials and semiconductor businesses to resist pressure. Product sales are still showing good positive growth. In 2023, it achieved operating income of 768 million yuan, a year-on-year increase of 20.06%, gross profit margin of 44.31% (up 5.96% over the same period of the previous year), and electronic chemical materials production and sales increased by about 24.6% and 18.0% year on year. Among them, the sales scale of electroplating solutions and additives for wafer manufacturing grew by about 50% year on year. The market share increased rapidly. The cleaning series products were successfully certified on the client side, ArF photoresist development progressed smoothly, and some models were impregnated with photoresist. The resin has achieved good test results. During the reporting period, the company's photoresist products achieved operating revenue of more than 4 million yuan. In addition, the company will reduce the “high-end photoresist R&D industrialization project for integrated circuits (mainly KrF thick film and ArF dry photoresist)” of which 165 million yuan will be used to add ArF immersion photoresist research and development projects. The remaining portion will focus on developing higher-end ArF immersion products.
The paint business was affected by the downturn in the construction industry and grew negatively, causing a certain drag on the company's performance. In 2023, the company's paint business revenue was 444 million yuan, down 20.08% year on year and gross profit margin was 19.35% (same decrease of 3.96pcts). The company's paint production and sales volume still increased 31.7% and 38.8% year on year, but due to the sluggish construction market environment, paint sales prices dropped sharply. The company is promoting the independent listing of its subsidiary Jiangsu Kaopule (which operates the paint business) on the new third board. In the future, the headquarters will concentrate resources to lay out the semiconductor materials business.
Actively participate in semiconductor industry investment funds to find upstream and downstream opportunities in the industrial chain. The company actively participated in upstream and downstream investments in the semiconductor industry. In addition to projects such as Suzhou Anxin Tongying (20 million yuan pledged), Jiangsu Xinchao Wanxin (40 million yuan), and Ningbo Hongyi (42.4 million yuan), the company also invested in a new long-term industrial investment fund (30 million yuan) during the reporting period. Promising industrial investment projects brought good incremental net income to the company. In 2023, the company confirmed a fair value change income of 42.1437 million yuan, accounting for 25.26% of net profit attributable to mother.
R&D costs continue to rise, and self-research efforts in semiconductor materials are being increased. In 2023, the company invested a total of 148 million yuan in R&D, accounting for 12.27% of the current revenue (10.36% in 2022), mainly focusing on projects such as photoresists for integrated circuit manufacturing, advanced process wet etching solutions, cleaning solutions, additives, and chemical mechanical grinding fluids. Since its launch, the company's semiconductor business has grown at a compound annual rate of nearly 30% in R&D investment. At present, the self-sufficiency rate of key process materials for domestic integrated circuits is still not high. According to the annual report information disclosed by the company, the overall localization rate of KrF photoresists is less than 5%, and the overall localization rate of ArF photoresists is less than 1%. The company attaches great importance to improving independent research and development capabilities, and the production and research process of related products is progressing smoothly, which helps China accelerate the domestic replacement process of high-end semiconductor materials.
The planned project was put into operation as scheduled, and the scale of production capacity continued to expand. During the reporting period, the company's target of expanding the production capacity of the Shanghai Songjiang Plant by 19,000 tons has been completed, the first phase of the Hefei Second Production Base has basically met the conditions for commissioning the first phase of 17,000 tons, and various procedures for the Hefei Phase II plan with an annual production capacity of 53,000 tons are being processed. In the reporting period, the company produced nearly 14,000 tons of chemicals, of which chemical materials used for wafer manufacturing accounted for more than 70%. In addition, the company officially started construction of a project located in the Shanghai Chemical Industrial Zone, with a construction area of 65,000 square meters and a total production capacity of 60,000 tons. The project is mainly used to develop photoresists and industrialize supporting materials. It is expected to be completed by the end of 2025 and put into operation by the end of June 2026.
Implement multi-phase equity incentive plans to ensure that core technical personnel redeem their incentives. The company has now implemented four equity incentive plans (Core Journey Phase I and Phase II, New Growth Phase I and Phase II). Each plan is adjusted according to the actual situation in the market. Achieving the performance assessment target can only be unlocked and adjusted to set the achievement rate of the performance assessment target. The portion can be unlocked in proportion to ensure that core technicians can redeem part of the incentives. In 2024, the company plans to re-implement the Xinyangxin Journey (Phase III) shareholding plan. The participants are core technologies/business personnel in the semiconductor business, with a maximum shareholding limit of 1.8 million shares (0.57% of the total share capital), and the maximum amount of capital to be raised is 31.212 million yuan. The shares used for this incentive have all been repurchased and locked in for 1 year. The performance assessment target is no less than 1 billion yuan for the semiconductor industry in 2024.
Supplementing previous incentive plans: ① Core Journey (Phase 1) The performance targets for the 2024 unlocking period are no less than 11/13/1.5 billion yuan (2022 company revenue of 1,196 billion yuan - achieved, 2023 company revenue of 1,212 billion yuan - partially achieved), ② Core Journey (Phase II) 2023-2025 unlock the performance targets for the 2023-2025 period are no less than 13/15/16 billion yuan, ③ New Growth (Phase I), the performance targets for the 2023-2023 attribution period are no less than 6 billion yuan for the semiconductor business /8/10 billion yuan (initial grant and reserve grant before 2022.9.30), not less than 8/10/12 billion yuan in 2023-2025 (reserved grant after 2022.9.30) (the company's semiconductor business revenue in 2022 was 640 million yuan - target achieved, 2023 was 768 million yuan - part achieved), ④ New Growth (Phase II) 2023-2025 vesting period performance target is semiconductor business revenue of not less than 8/10/12 billion yuan.
Investment proposal: The company continues to advance the R&D and production process of high-end semiconductor materials. The new construction project was completed as scheduled, the product diversification layout and production capacity scale were accelerated. Under industry pressure in 2023, the company's semiconductor business is still showing good growth. The fundamentals of the downstream semiconductor industry are expected to gradually improve in 2024, high-end electronic materials accelerate localization, and the company's performance is expected to grow. It is expected to achieve net profit of 2.02 and 281 million yuan in 2024-2025 (the original forecast was 205 to 288 million yuan. Considering the current situation in the construction industry, the current forecast value is Paint performance was slightly lowered; profit and loss from changes in fair value were slightly adjusted according to the company's investment projects), and the net profit forecast value for 2026 was 364 million yuan, corresponding to PE 53.9, 38.8, and 29.9 times on March 14, 2024, respectively. Combined with the expansion of the company's scale, performance growth, and terminal fundamentals, it is expected that expectations will be repaired, and the “recommended” rating will be maintained.
Risk warning: 1. The growth rate of terminal demand falls short of expectations. If the fundamentals of the semiconductor and other terminal industries fall short of expectations and demand is difficult to recover, the growth rate of the company's electronic chemicals business may be limited. 2. The risk of increased market competition and a sharp decline in product prices. If comparable companies achieve technological breakthroughs and drastically increase the scale of production capacity, it may cause the risk of overcapacity for some products and increased market competition, which in turn will lead to a decline in the prices of related products, and gross profit will be drastically reduced. 3. The risk of large fluctuations in raw material prices. If basic chemical raw materials are affected by factors such as extreme climate and overseas geopolitics, manufacturers are prevented from starting construction, and the fundamentals of supply and demand and inventory structure change greatly, the price of raw materials may fluctuate greatly, causing the company's production costs to rise sharply.