Summary of institutional reviews: Huawei mobile phones are conducive to the localization of the semiconductor industry chain

【West China Machinery】Japan-Netherlands sanctions take effect, Huawei returns, optimistic about sector investment opportunities

The dust of US, Dutch and Japanese sanctions has fallen, and the logic of domestic substitution continues to strengthen.

(1) Japan and the Netherlands export controls took effect in July and September respectively, data from the General Administration of Customs of China show that the amount of semiconductor equipment imported from Japan and the Netherlands Chinese mainland in June to July increased significantly year-on-year, especially the value of imported Dutch lithography machine equipment has increased significantly, which shows that the core equipment is not a bottleneck for short-term expansion.

(2) In the medium and long term, the dust of sanctions from the United States, the Netherlands and Japan has landed, and domestic semiconductor equipment is expected to accelerate import substitution.

Overall, the localization rate of semiconductor equipment is still at a low level, and for quantity/detection, glue development, ion implantation equipment, etc., we judge that the localization rate will still be less than 10% in 2022, and there is a large space for domestic substitution.

At the technical level, domestic semiconductor equipment enterprises have certain advanced process equipment technology accumulation in the fields of thin film deposition, etching, measurement/detection, CMP, and cleaning.

Under the background of the escalation of overseas sanctions, the logic of import substitution of semiconductor equipment continues to strengthen, we are optimistic that fabs will accelerate the introduction of domestic equipment, and the localization rate of semiconductor equipment in 2023 is expected to exceed market expectations.

The return of Huawei Mate 60 series mobile phones is conducive to the localization of the semiconductor industry chain.

(1) On August 29, 2023, Huawei's high-end smartphone Mate 60 series returned strongly, triggering a domestic consumer purchase boom, according to a third-party disassembly report, Mate 60 Pro is equipped with a new Kirin 9000s chip and uses advanced 7 nanometers, making a major breakthrough.

(2) In the semiconductor field, Huawei has developed and invested in both R&D and investment, and HiSilicon has established a relatively complete chip product system, covering the AI chip Ascend series, cloud computing processor Kunpeng chip, mobile phone SoC chip Kirin series, 5G base station chip Tiangang, 5G baseband chip Baron, and connection chip Lingxiao series, providing support for Huawei's self-developed chips. Industrial investment relies on Hubble investment, according to enterprise investigation data, as of September 2023, Hubble has invested in more than 90 related companies, and incomplete statistics of 14 companies that have been listed.

We believe that the return of the Mate 60 series is of great significance, equipped with the domestic Kirin 9000s chip, which is a phased victory for Huawei's domestic breakthrough, optimistic about the continuous breakthrough of other high-end chips in the future, and comprehensively benefit the domestic replacement of the semiconductor industry chain, and the upstream semiconductor equipment link is expected to benefit.

Investment advice: Semiconductor equipment beneficiaries of Jingtest Electronics, Topjing Technology, Huahai Qingke, Xinyuan Micro, Zhongke Flight Test, North Huachuang, AMEC, Shengmei Shanghai, Changchuan Technology, Zhichun Technology, Wanye Enterprise, Huafon Measurement and Control.

Parts benefit from Zhengfan Technology, Xinlai Applied Materials, Fujing Technology, Fuchuang Precision, Maolai Optics, Jiangfeng Electronics, Huaya Intelligence, etc.

【Zhongtai Agriculture】Pet food industry research framework

Looking back, how has the industry changed?

Comparison of the development process of Chinese and foreign industries: China's pet industry started late, but the development speed is fast, with the consumption power of residents, pet concept and the rapid development of e-commerce, it is currently in a period of rapid development.

Pet Industry Chain:

China's pet industry chain is gradually improving, the live pet trading market is scattered, most of the players are individual businesses or individuals, and there are no unified supply channels, which is difficult to form scale effects;

Daily pet consumption mainly includes pet food and supplies, and the food market is the largest, with fast turnover and the easiest to form brand trends;

Pet services mainly include basic services such as pet cleaning, boarding, and medical treatment, as well as customized services such as pet grooming, training, and funeral, and the entry threshold for other tracks other than pet medical treatment is low.

Industry scale: As a product just needed in the pet track, the pet food market in mainland China has increased from 17 billion yuan in 2016 to 51 billion yuan, with a CAGR of 25%.

(1) Sub-category: The snack track has strong momentum, and the cat food track has broad prospects.

As a direct entertainment link and auxiliary training tool for pet owners and pets, snacks have the fastest growth rate.

Due to the fast pace of urban life, the small living area, and strict restrictions on dog ownership in the city, the number of cats has grown rapidly, and the future cat food has broad prospects.

(2) Sub-channel: the share of e-commerce channels is large, and the development is strong and accelerates penetration, the chain rate of offline pet stores is low, and scientific pet breeding drives pet hospital consumption.

Competitive pattern: The head enterprises mostly adopt a multi-brand strategy, and the company's market share is significantly higher than the brand market share.

Due to the many subdivisions and complex categories of the pet food industry, a single enterprise adopts a multi-brand strategy to meet the diversified needs of the market, and the company's market share is significantly higher than that of brands in both China and overseas mature markets.

According to Euromonitor data, in 2022, the CR10 of the pet food market companies in the United States, Japan and South Korea was 47.4%, 50.4% and 41.7%, respectively, while the Chinese pet food brand CR10 was only 24.0% in the same period.

At the same time, in the past five years, the market share of US, Japanese and Korean companies and brands CR10 has shown a gradual increase trend, while China's CR10 market share has gradually declined, we believe that mainly due to the rapid development of the domestic industry, a large number of new entrants to seize market share, while mature overseas brands are slower in domestic consumer perception, channels and marketing, and their market share has declined.

We believe that the barriers to the pet food industry are essentially barriers to brand recognition, and reasonable marketing strategies and marketable sales channels will present quality products to consumers.

From a profitability perspective, brand profitability can only be sustainable if strong brand recognition is formed. With the improvement of brand awareness, on the one hand, it is easier for brands to increase the gross profit margin of products through price increases and product structure optimization, and on the other hand, after the scale of sales expenses, profitability increases.

【Guosheng Light Industry】Sun Paper: The bottom profit is consolidated, and the dividend of the Laos base is beginning to appear

After more than ten years of pioneering efforts, the barriers are difficult to overcome.

The management is very strategic, the employees have a great sense of identification and pride in the company, and for more than 10 years have adhered to and insisted on forging a modern base in the oasis, striving for good governance, continuous breakthroughs in efficiency, gradually increasing the proportion of employees and efficiency in Laos, and gradually expanding forest resources, and the raw material dividend is expected to accelerate.

With high barriers to entry for overseas factory construction, difficult cultural integration, and long forest land cultivation cycle, the company has entered a mature operation period, and it is expected that the performance is expected to gradually materialize.

We expect that the cost per ton of self-produced wood chips at the company's Laos base is lower than the procurement cost, and the current self-sufficiency rate of wood chips is about 40%.

The economy is up, and Q3 earnings are expected to rise month-on-month.

With the strategic layout of raw material resources and excellent cost control capabilities, the underlying profit was further consolidated, the Q2 industry as a whole was at the breakeven line, Sun Paper's Q2 net profit achieved about 690 million yuan (annualized underlying profit of about 2.5 billion, PE of about 13.7X based on the current market value, PB only 1.4X as of September 27), with the recovery of demand and the landing of price increases, superimposed on the launch of new production capacity, the profit was stable and upward.

In addition, if the momentum of subsequent economic recovery appears, we expect that the paper industry is expected to replicate the boom cycle of pulp and paper growth in 2020, and the company's high wood pulp self-sufficiency rate is expected to fully benefit.

The Guangxi base has been steadily constructed, and the integration of forest pulp and paper can be expected.

At present, the company's total production capacity has exceeded 10 million tons, of which the total production capacity of pulp and paper has reached 4.35 million tons and 5.79 million tons respectively, and the integrated pattern of forest pulp and paper has initially taken shape.

In the second half of 2023, the company still has some production line adjustment plans, cost dividends are expected to further appear, Nanning base 1 million tons of high-grade packaging paper production line and 500,000 tons of natural color chemical wood pulp production line is expected to be trial production at the end of 2023Q3, it is expected to contribute to Q4 increment, Shandong, Guangxi, Laos three bases into a new stage of coordinated development.

In addition, the cost advantage of the company's self-produced wood chips in Laos has gradually emerged, and the integrated layout of forest pulp and paper has continued to deepen.

Profit forecast and investment rating: We expect the net profit attributable to the parent in 2023-2025 to be 2.93 billion yuan/3.58 billion yuan/4.30 billion yuan, respectively, corresponding to a PE of 12X/10X/8X, maintaining a "buy" rating.

【Huachuang Computer】Tianrongxin: Firmly sit at the forefront of the firewall and lay out a new security field in a forward-looking manner

Tianrongxin is a leader in the network security industry and has the core ability of "one specialty, many strong".

The company is the first network security company in China, with an industry-leading market share, and is also the creator of the first firewall with independent intellectual property rights in China.

Based on the next-generation trusted network security architecture NGTNA, with network security as the core, big data as the basis, and cloud services as the delivery mode, the company has formed a comprehensive security guarantee system of comprehensive perception, intelligent collaboration, dynamic protection, and cohesion empowerment, and has the core competitiveness of "one specialty, many strong" products: the market share of the company's firewall series products has ranked first for 23 consecutive years, VPN, WAF, network gateway and other products have ranked among the top three in the market for many consecutive years. Industrial Internet security products and services, situational awareness, security management platform, EDR and other products are in the market leader.

Laws and regulations escort the development of the cybersecurity industry, frequent cybersecurity incidents accelerate the release of cybersecurity requirements, and new security scenarios create incremental space.

According to IDC, by 2026, China's cybersecurity spending is expected to approach US$28.86 billion, with a five-year compound growth rate of 18.8%, ranking first in the world.

The rapid growth of cloud services and data security industry has led to the rapid growth of cloud services and data security industry due to the vigorous development of data production and digital economy: China's cloud computing industry is generally in a stage of rapid development in 2022, with a market size of 455 billion yuan, an increase of 40.9% over 2021; In the data security industry, it is expected to reach 47.8 billion yuan by 2025.

The "2+8+N" information and innovation industry is steadily advancing, and it is expected that the market size of the information and innovation industry will exceed 2 trillion yuan in 2025, and the development of the information and innovation industry is inseparable from security capacity building, and network security as the "protective wall" of the information and innovation industry may continue to benefit.

The company has a forward-looking layout of the outlet industry, and has ushered in breakthrough growth after years of precipitation.

In the field of data security, the company has formed a security product and consulting service system covering the data life cycle; In the field of cloud services, the company released Tianrongxin Taihang Cloud 4.0, Hyperconvergence 4.0, and Desktop Cloud 4.0 to comprehensively improve product performance and ease of use.

In the field of information and innovation, the company closely follows the pace of the country's localization construction in network security, actively promotes the construction of localized network security ecology, and in the first half of 2023, the revenue of information and innovation business increased by 74.27% year-on-year, of which the revenue of its own security products increased by 90% year-on-year.

Investment advice: We expect the company's operating income from 2023 to 2025 to be 4.583 billion yuan, 5.801 billion yuan and 7.256 billion yuan, corresponding to growth rates of 29.3%, 26.6% and 25.1%; The net profit attributable to the parent was 453 million yuan, 600 million yuan and 777 million yuan, with corresponding growth rates of 121.0%, 32.4% and 29.4% respectively; The corresponding EPS (dilution) was 0.38 yuan, 0.51 yuan and 0.66 yuan, respectively.

In terms of valuation, with reference to comparable companies, we give the company 35xPE in 2023, corresponding to a target price of 13.3 yuan.

For the first coverage, a "Recommended" rating is given.

【Zhongtai New Materials】Guanggang Gas: Helium as the spear, the leader of electronic bulk gas

Leading integrated supplier of electronic bulk gas, leading domestic supplier of helium.

Founded in 1969, the company is one of the first joint venture gas companies in China, with more than 50 years of gas operation experience, with profound heritage and accumulation.

The company is one of the very few domestic electronic bulk gas suppliers that can compete with the three major international gas companies; At the same time, taking the helium resources divested by Linde Group in 2020 as an opportunity, independent and controllable technical capabilities have been formed around the complete supply chain of helium.

The domestic substitution of electronic bulk has accelerated, and the orders in hand are abundant and have strong growth.

1) Business model: both profitability stability and high added value.

The electronic bulk business is mainly based on on-site gas supply, and the fixed fee part provides "profit stability" guarantee.

Electronic bulk gas is used in the electronics industry chain, and high requirements such as ultra-high purity/stable/reliable/full-variety supply create high barriers, and the gross profit margin and added value are higher.

2) Market size: the market of tens of billions continues to expand, and the screen display & IC field is the core.

The market size is expected to be about 9.5 billion yuan in 2022, with a CAGR of about 8.7% in 22-25 years.

Electronic bulk gas is mainly used in semiconductor display/IC/LED/optical fiber/photovoltaic fields, of which the gas cost in the semiconductor display/IC field accounts for 65%/55% respectively, which is higher than electronic special gas.

3) Company advantages: leading market share and sufficient orders in hand.

In the existing market, the company's share in 2021 was about 8.0%, and in terms of new markets, the company won the bid share of 25.4% in the new projects in the semiconductor display & IC field from 2018 to September 2022, ranking first in the country by virtue of its advanced and mature operation management experience and equipment technology advantages.

The company has abundant orders on hand, and with the gradual landing of the project, it is expected that the company's electronic bulk business revenue in 2023-2025 will be 12.5/17.0/2.27 billion, YoY+29.6%/35.8%/33.4%.

Profit forecast: The company is a domestic leader in electronic bulk gas and helium in China, with obvious management and technology research and development advantages, abundant orders in hand, and strong growth.

We expect the company's net profit attributable to the parent in 2023-2025 to be 3.0/4.0/510 million yuan, corresponding to the current stock price PE of 47.9x/35.9x/28.0x, respectively, and the PB under the company's latest net asset caliber is only 2.6 times, which is lower than the average of comparable companies, covered for the first time, and given an "overweight" rating.