Investment logic

Deeply cultivating silicon carbide (SiC) substrates, the company focuses on the research and development, production and sales of SiC single crystal substrates, and its products are widely used in communications, new energy vehicles, photovoltaic energy storage and other fields.

With the Lingang factory reaching production ahead of schedule and the batch shipment of conductive substrates, the inflection point of continuous revenue growth has arrived, with 1-3Q24 revenue and net profit attributable to the parent company +55% and +310% year-on-year respectively.

The main concerns of the current market for SiC substrates:

1) The price of SiC substrates has dropped sharply in the short term, and the market has entered the involution in advance?

In the short term, the global 6-inch SiC substrate production capacity is rapidly released, the demand for new energy vehicles is slowing down in stages, and the price of SiC substrate is under great downward pressure in the short term. The price competition is mainly caused by the rapid expansion of domestic production capacity and the unstable contract performance due to the significant difference in yield between different manufacturers. In the future, 6 to 8 inches may become the key to cost reduction, with the acceleration of domestic and foreign manufacturers to accelerate the layout, the company took the lead in achieving a breakthrough in large-size substrate technology, and consolidated the industry's leading position with liquid phase crystal growth and the industry's first 12-inch substrate, we believe that the company is expected to achieve cost optimization in the gradual emergence of scale effect, so as to maintain a competitive advantage.

2) How do you see the medium- and long-term growth space of the SiC substrate business?

In the medium and long term, the price gap between SiC substrates and traditional silicon substrates is gradually narrowing, which is conducive to accelerating the penetration of SiC into downstream applications. According to SMM's 2023 forecast, the downstream share of automobiles in SiC will increase from 65% in 2023 to 86% in 2028. In 3Q24, global tram sales were 4.49 million units (YoY+20.2%), with a penetration rate of 20.9%; Domestic tram sales totaled 3.229 million units (YoY+36.2%), with a penetration rate of 44.8%. Global automobile consumption is weak, and China's electrification boom continues to provide high-quality soil for the growth of SiC. At present, the SiC substrate market is still dominated by overseas manufacturers, and domestic companies are catching up, according to Fuji Economic Statistics, in the global conductive substrate market in 23 years, the company's market share surpassed Coherent to rank second. Although Wolfspeed has the largest market share for many years, its market share has continued to decline due to competitive pressure from domestic substrate companies. 7M24 announced a plan to issue shares to specific targets through simplified procedures, and the specific number of additional shares has not yet been determined, raising 30,000 yuan to invest in the 8-inch automotive-grade SiC substrate preparation technology improvement project.

Earnings forecast, valuation and rating

Excluding the implementation of simple private placement, we forecast that the company will achieve operating income of 16.81/23.00/3.099 billion yuan in 2024~2026, respectively, +34%/+37%/+35% year-on-year, and net profit attributable to the parent company of 1.90/3.19/448 million yuan, +537%/+68%/+40% year-on-year, corresponding to EPS of 0.44/0.74/1.04 yuan. We believe that the company is expected to reduce costs and increase efficiency by virtue of its production capacity and technological advantages, and further expand its market share, giving 90xPE in 2025, corresponding to a target price of 66.78 yuan/share, covering it for the first time, and giving a "buy" rating.

Risk Warning:

Intensified market competition; The increase in capacity yield is less than expected; sales of new energy vehicles fell short of expectations; 6/8-inch substrate price reduction more than expected; geopolitics; Restricted shares are lifted.