The main supplier of special MLCC in China, leading domestic CMC materials, first-class in the world: Torch Electronics is a high-tech special military enterprise whose main business covers two types of products: capacitors and CMC new materials. The company is one of the top three suppliers of special MLCC products in China. It has established good cooperative relationships with most downstream special enterprises and institutions, and has stable customer relationships. The company has mastered a series of proprietary technologies for the industrialization of “high-performance special ceramic materials”. The product range covers a comprehensive range. It is one of the few domestic enterprises with large-scale production capacity for ceramic materials. The company's product performance and production capacity already have a stable supply capacity, and has established a leading position in the field of CMC hot new materials in China.

The localization of military equipment and the upgrading of informatization are booming, and civil-military integration is driving the continued increase in demand for MLCC: Torch Electronics' self-produced component products are mainly military, supplemented by civilian use. Under the basic trend of localization and informatization upgrading of military equipment, China's military budget in 2023 grew 7.2% year-on-year, and the growth rate has continued to grow for 3 consecutive years. With the completion of the mid-term adjustments of the “14th Five-Year Plan”, it is expected that future military orders will continue to increase steadily; at the same time, with the upgrading of traditional consumer and industrial electronic products and the rapid development of automotive electronics, new energy vehicles, 5G, etc., the capacitor industry will face good development opportunities and broad market space, and the company's trade business will usher in development opportunities.

With the gradual application of new special ceramic materials to military and civilian products, CMC is expected to create a second performance curve: CMC components from leading international ceramic materials companies have been widely used in hot end structures of high-end military and civilian equipment such as aviation, aerospace, missiles, nuclear industry, and braking systems, and the scope of application continues to expand.

Torch Electronics Liya Co., Ltd. has broken through various key technologies for the industrial preparation of high-performance ceramic fibers. The technology and product level have reached leading domestic and international standards. It is currently one of the leading enterprises in special high-performance chemical new materials in China. With the successive completion of domestic related product research and development, the compensatory development of national defense and military industry, and the goal of strengthening the military to drive equipment upgrades in various fields and the accelerated installation of next-generation equipment, the CMC downstream market continues to expand, which is expected to drive corporate performance to rise.

Profit forecast and investment rating: With the completion of the mid-term adjustments of the “14th Five-Year Plan” and the compensatory development of the defense and military industry, it is expected that defense demand will release strong momentum, and downstream military orders will continue to increase, driving the growth of corporate component business revenue. At the same time, the new materials sector will drive further growth in the company's performance as domestic downstream application puzzles are completed and expanded. We expect the company's net profit to be 4,53/625/762 million yuan in 2024-2026, respectively, and the corresponding PE will be 25/18/15 times, respectively, covered for the first time, and given a “buy” rating.

Risk warning: 1) Risk of downstream order growth falling short of expectations; 2) market competition risk; 3) management risk due to expansion of business scale; 4) risk of accounts receivable increasing due to increased business scale.