LowDK electronic cloth is gaining attention and is mainly used in high-tech electronic products.

Recently, investors' attention to the industry chain related to LowDK electronic cloth has been heating up. LowDK electronic cloth refers to electronic cloth with low dielectric constant. By using special raw materials and process technology, electronic cloth has low medium/low loss characteristics, achieving the effect of further reducing plate signal loss and improving signal transmission speed. It is mostly used in fields that require fast signal transmission and low loss. Due to the development of high-frequency substrates, reducing Dk/Df has become a hot topic for the substrate industry to meet customer demand for high-end low dielectric constant electronic fabrics.

The dielectric constant (usually expressed as Dk) is an indicator of the ability of a material to store electrical energy. It is the ratio of the capacitance between the electrodes when charged with a substance to the capacitance of a vacuum capacitor of the same structure. Capacitance has an effect on signal transmission speed: when the Dk value is high, it indicates that the material's ability to store electrical energy is strong, which causes the transmission speed of the electrical signal in the circuit to slow down; when the Dk value is small, it indicates that the material's ability to store electrical energy is weak, which makes the transmission speed of the electrical signal in the circuit faster. In high-speed circuit design, materials with lower Dk values are usually selected to reduce signal delay and improve circuit response speed.

Low dielectric electronic yarn and electronic cloth have low dielectric constant, low dielectric loss, good quality consistency, low bubble count, stable raw wire density, good twist uniformity, good weaving performance, low fuzz, heat resistance, excellent chemical resistance and flame resistance. It is a key basic material for manufacturing high-frequency high-speed electronic products, and is widely used in 5G communications, artificial intelligence (AI), IC packaging, smart phones, high-speed data centers, aerospace and other fields.

The company has been involved in the LowDK electronic cloth field for a long time.

In the 2022 annual report, the company disclosed the “2nd Generation Low Dielectric Glass Fiber Key Technology Research” R&D project. The purpose of the project is to break through the key preparation technology of low dielectric glass fibers and develop second-generation low-dielectric glass fibers and products to meet the needs of China's 5G/6G high-frequency high-speed electronic information market; as of the disclosure date of the 22nd annual report, it has completed research on low dielectric glass formulations and key preparation techniques, and began trial production of the 2nd generation low dielectric glass fiber and electronic cloth; the intended goal of the project is to develop dielectric constant Dk ≤ 4.3 (10 GHz) and dielectric loss Df≤0.0022 (10GHz) second-generation low-dielectric glass fiber yarn and electronic cloth; it is expected that the project will help the company optimize the product structure and promote the company's high-end and differentiated development.

Revenue and profit declined in the first three quarters, and increased competition in the diaphragm industry dragged down profitability.

In the first three quarters of 2024, the company achieved total revenue, net profit to mother, and net profit after deduction of 16.8/0.61/0.32 billion yuan, respectively, -8%/-64%/-78%; of these, 24Q3 achieved total revenue, net profit to mother, and deducted non-net profit of 6.3/0.14/0.09 billion yuan, respectively, +6%/-55%/-64% year-on-year. In the first three quarters of 2024, the company achieved gross margin/net margin of 17.8%/4.5%, and -6.6pcts year-on-year; of these, 24Q1-Q3 gross margins were 19.4%/17.7%/16.8%, respectively, and net interest rates were 6.6%/4.6%/3.0%, respectively. Profitability continued to decline in a single quarter. In the first three quarters of 24, glass fiber prices generally bottomed out, and the profits of glass fiber companies generally improved; new wind power installations increased year-on-year, but fan prices remained low in the short term, and the profitability of enterprises in the wind power industry declined; in the diaphragm business, competition in the industry intensified further, the price war heated up, and profit levels faced serious challenges.

Investment advice: Sinoma Technology's forward-looking layout in the field of LowDK electronic cloth helps strengthen the company's competitive advantage in the high-end product field and find new revenue and profit growth points in the context of fierce competition in the domestic market. Considering the sharp decline in the company's profit in the first three quarters of 24, and the profitability of the wind power and diaphragm business has not improved significantly, we lowered the company's net profit forecast for 2024-2026 to 0.955 billion yuan (61% reduction), 1.246 billion yuan (57% reduction), and 1.501 billion yuan (55% reduction), respectively. The current price corresponds to the company's 2024 dynamic price-earnings ratio of 24x, maintaining a “buy” rating.

Risk warning: the risk of a sharp rise in upstream raw material prices, the risk of downstream demand falling short of expectations, and the risk of a sharp reduction in product prices due to worsening industry competition.