Incident: On May 27, 2024, the company signed the “Semiconductor Chip Advanced Polishing Pad Project” Cooperation Agreement with the Jiangsu Jintan Hualuogeng High-tech Industrial Development Zone Management Committee. The agreement was registered to invest 300 million yuan (the final investment amount is based on the actual investment in project construction). After the successful completion of the project, the annual production of 250,000 advanced semiconductor chip polishing pads can be achieved, and the annual sales are expected to be about 800 million yuan after full production.

The performance was impressive, and ArF photoresists are expected to start in the second quarter. In 1Q24, in terms of business structure, the company's specialty rubber additives business was 597 million yuan, electronic chemicals business was 156 million yuan, and fully biodegradable materials business was 29.06 million yuan, exceeding market expectations. The sharp increase in performance was mainly due to increased operating profit and revenue generated by investment in joint ventures. In terms of business conditions, as of the first quarter of '24, many of the company's KrF and I-line photoresists have been verified by leading domestic chip companies and storage manufacturers, and will gradually be released in the second quarter of 2024; the company has already completed the development of some models of ArF photoresists. Currently, ArF photoresists have been mass-produced and shipped by leading domestic chip companies, and will enter the gradual release stage. All process indicators of the first batch of ArF photoresists can match the products of major international photoresist manufacturers. The current production capacity can simultaneously supply most domestic chip manufacturers, and can also meet the demand for advanced domestic photoresists.

Invest in the construction of a semiconductor chip polishing pad production base to increase the layout of semiconductor materials. Based on the company's long-term development plan and business development needs, the company's subsidiary Shanghai Tongcheng Electronic Materials Co., Ltd. plans to invest in the construction of a semiconductor chip polishing pad production base in the Jintan Hualuogeng High-tech Industrial Development Zone (hereinafter referred to as “Hualuogeng High-tech Zone”), with an agreed investment of 300 million yuan (the final investment amount is subject to the actual investment in project construction), mainly engaged in R&D, production and sales of semiconductor chip polishing pads. As one of the important materials in the semiconductor process, advanced polishing pads for semiconductor chips have a broad market scale. The product performance currently being developed by the company shows strong technological leadership, and can provide the company with new business growth points after mass production.

CMP polishing pads have broken the oligopoly and are taking advantage of the trend. On the one hand, China is a country with a large demand for semiconductor chips, but the chips needed are highly dependent on imports. On the other hand, there is a demand gap for domesticated semiconductor chip products. Judging from China's IC market size and IC output value, the huge demand gap is highly dependent on the supply of large overseas manufacturers. According to TECHCET data and forecasts, the global semiconductor materials market fell 3.3% year on year in 2023, but will grow by nearly 7% year on year to reach 74 billion US dollars in 2024; the market size is expected to reach more than 87 billion US dollars in 2027. At present, although the market penetration rate of domestic CMP polishing pad products is extremely low, China's Dinglong Co., Ltd. has achieved a technological breakthrough, mastered a full set of core technologies for CMP polishing pads, and took the lead in breaking the monopoly of foreign companies and entering the domestic mainstream domestic fab supply chain, changing the domestic CMP polishing pad market from a competitive pattern where foreign companies have absolute monopoly. Tongcheng New Materials is expected to benefit both from the domestic CMP polishing pad stock market and the incremental market brought about by the expansion and production expansion of domestic fabs.

Investment advice: The company is the leading semiconductor photoresist in China, and we are optimistic about the gradual release of the company's series of products. The company's net profit for 2024-2026 is estimated to be $516/615/760 million yuan, respectively, and the current price corresponding to PE is 36/30/24 times, respectively, maintaining the “recommended” rating.

Risk warning: risk of product price fluctuations, downstream demand falling short of expectations, technology iteration risk, etc.