Key points

Demand for terminals picked up, and the company's 2Q24 single quarter performance reached a record high

There are signs of a recovery in demand for terminals in the market. High-end products represented by products such as backlighting, high light efficiency, and inverted silver mirrors are booming. According to TrendForce, the global LED market will recover in 2024. According to WIND data, the Q2 performance of many LED chip companies improved significantly. In terms of the overall state of the industry, we judge that 2024 is expected to become a key point for the LED industry to gradually break out of its trough and achieve full recovery.

According to the 2024 company report, Q2's revenue for the single quarter was 0.733 billion yuan, +11.81%, and +22.13% month-on-month; Q2's net profit for the single quarter was 0.065 billion yuan, +98.92% year-on-year, and +35.07% month-on-month. Revenue and net profit to mother both hit record highs in a single quarter since 2019.

The company's Q3 performance declined month-on-month. We believe that due to fluctuations in market demand, the LED market was briefly impacted, but the overall positive trend has not changed.

Continued and refined management, with significant advantages over the industry, the company's capacity utilization rate, production and sales rate remained consistently high, and sales scale reached a record high; economies of scale were prominent. Some gas production was self-made, raw material prices were reduced, and manufacturing costs continued to decline; production efficiency continued to improve, expenditure control was effective, costs were reduced and efficiency increased, and financial expenses dropped sharply year-on-year.

According to WIND data, the trend of changes in the company's index is consistent with the average value of the SW LED sector, but the absolute index is far superior to the average value of the sector in which it is located, and gradually widens the gap with the sector average. As of 1H24 data, the number of accounts receivable turnover days is better than the sector average of 50.96%, and the number of inventory turnover days is better than the sector average of 71.01%.

Red and yellow LEDs complete the product sequence, and the increase in the MLED market brings broad development prospects

The company has begun to deploy red and yellow LED chips. Since the technical selection of blue light chips with fluorescent powder has been adopted in the field of lighting and backlighting, red and yellow light is more used in the display field. Previously, due to the lack of GaAs-based red and yellow LED chip product layout, the company's competitive advantage in rapidly growing display segments such as new MLED displays was not outstanding. Achieving the production and sale of full-color LED chips will help the company expand its market share, consolidate its market position, and cultivate new profit growth points. The continuous growth of the MLED market will lead to an increase in demand for red light chips.

According to LED data from Gaogong Industrial Research and Development, the MiniLED market size in mainland China will rise from 3.78 billion yuan in 2020 to 43.1 billion yuan in 2026, with a compound annual growth rate of 50%, and is expected to reach 10 billion US dollars in 2027. We believe that after the launch of the company's Red and Yellow Light Project, it will quickly occupy part of the market, enhance its competitiveness in the MLED field, fully enjoy the dividends of market growth, and have broad development prospects.

Investment advice:

We believe that the company's LED chips and epitaxial films are strong. The core product, Red and Yellow LED, is expected to maintain rapid growth after launch, and is expected to generate more revenue growth. We expect the company's revenue in 2024-2026 to be 2.827/3.34/3.876 billion yuan, net profit to mother of 0.22/0.272/0.313 billion yuan, EPS 0.32/0.40/0.46 yuan, and the closing price on October 18, 2024 is 11.53 yuan. The corresponding PE is 35.49/28.63/24.93 times, giving the company an “increase in wealth” rating for the first time.

Risk warning

New product development and development fell short of expectations, industry competition intensified, etc.