(Report Producer/Analyst: Guojin Securities, Xu Junyi, Fan Zhiyuan)
1. Deeply cultivated in the field of clean room for more than 20 years, equipment and consumables are dual-driven
Founded in 2001, the company is a leading supplier of clean room equipment in China, focusing on semiconductor and electronics, biomedicine, industrial dust removal and VOCs treatment and other market segments, including fan filter units (hereinafter referred to as FFU), filter products and air purification equipment.
There are three main stages of air purification in a clean room:
1) The first stage: the temperature and humidity are controlled by the air conditioner and the filters are used to pretreat the fresh air entering the room from the outside to intercept the large particles common in the air. Usually the equipment is located outside the wall panel of the physical isolation layer of the clean room (production workshop), and the pre-treated air will enter the inside of the clean room wall panel.
2) The second stage (the company's core business link): the core product fan filter unit (including high-efficiency/ultra-high-efficiency filters, chemical filters, etc.) is distributed at the top of the physical isolation layer of the clean room (production workshop), and further treatment of other fine particles, gaseous molecular pollutants and microorganisms in the pretreated air has not been treated, so as to meet the extremely high air purification level requirements of semiconductor and biopharmaceutical production workshops.
The filtration technology used in this link has high requirements, and it is necessary to design and produce specific filter materials according to the composition and cleanliness requirements of releasing specific chemical gases, and design scientific air flow guidance.
3) The third stage (the company's core business link): the return air is sent to the fan filter unit through the raised floor and the return air mezzanine, and then sent to the clean room for reuse.
The downstream of the company's products involves multiple industry scenarios.
(1) FFU+ filter is used in clean plants and clean rooms in semiconductor, biopharmaceutical, food processing and other industries;
(2) Air purification equipment is used in biopharmaceutical production lines (biosafety, aseptic purification equipment), indoor air purification (commercial, medical, household air purifiers), industrial production (industrial dust removal equipment/oil mist removal equipment), catering scenes (oil fume removal purifiers)
The company has 7+2 production bases at home and abroad, and its scale structure focuses more on the high-end market of FFU+ filters in the pan-semiconductor field.
Overall, driven by R&D and with product strength as the selling point, it has helped the company achieve a performance growth rate of 15.7% in revenue CAGR and 20% in net profit attributable to the parent company in 19~22. Among them, the revenue in the semiconductor field accounted for the highest proportion of total revenue, with revenue of 270 million yuan in 1H22, accounting for 48.3%. At present, the company has achieved a leading position in the industry - the market share of semiconductor clean room scenarios is 30%, ranking first in the industry (disclosed in the 1H23 interim report).
The air filtration industry started early in developed regions such as Europe and the United States, and has developed a number of international air filtration companies such as CAMFIL in Sweden and AAF in the United States.
Judging from the current industry competition pattern, the domestic clean room industry has a high degree of marketization, and the competition in the low-end market is relatively fierce, but there are few enterprises that can undertake high-level clean room system integration solutions. With the development of downstream semiconductors and pan-semiconductors, display panels, biopharmaceuticals and other industries, higher requirements are also put forward for clean rooms.
Due to the complex structure and strong systematization of the clean room system, most of the enterprises in the domestic industry are relatively small, so the technical level and comprehensive solution ability are limited, and they are generally concentrated in the low-end market with low requirements for dust-free grades, and the price competition is fierce. Only a few enterprises have professional technology, financial strength, project experience and comprehensive management capabilities, and can provide system integration services for large, medium and high-end clean rooms.
The company's product strength is better than that of domestic and foreign counterparts. The company's core business competition is mainly AAF and Camfil, the two major overseas leaders, as well as the domestic listed company Zaisheng Technology. Among them, AAF and Camfil started earlier, both have completed the global layout, and also occupied a large market share in China in the early stage.
The key indicators are leading, and the energy consumption/noise control ability is outstanding under the same level of filtration efficiency.
1) FFU 性能指标关注总静压、耗电量、噪音。
The filtration efficiency of the FFU machine is determined by the efficiency level of the HEP/UHPA filter, and the functional requirements of the FFU box are to overcome the resistance of the HEP/UHPA filter and the system resistance, and deliver the air volume required by the design, while taking into account the energy saving and noise requirements.
(1) Total static pressure: It directly affects the clean air supply capacity of the FFU, which in turn affects the cleanliness of the clean room. The performance of the company's products is 30~40Pa higher than that of its peers.
(2) Power consumption: reflects the efficiency of the fan, which has a great impact on the operating cost of the clean room. Due to the need for full distribution and continuous operation, the energy consumption cost is large.
The company comprehensively uses the invention patent of "a high-efficiency fan filter unit" and the core technologies such as "FFU energy-saving noise reduction and system integration technology", which can increase the FFU efficiency from 58% to more than 64% of the bare metal efficiency of the fan.
Taking a clean workshop of 50,000 FFUs as an example, if the power consumption of each FFU is reduced by 10W (the power of the company's products is 152W, and the power of Zaisheng Technology is 164W), the corresponding annual electricity expenditure will be reduced by about 3.5 million yuan.
(3) Noise: The national standard requires that the overall noise of the clean room is less than 65 dB(A) or less (full cloth). The noise level of the company's products is slightly higher than that of overseas counterparts AAF, and lower than that of domestic comparable companies Zaisheng Technology.
2) The filter resistance control is better than that of peers, which further helps to reduce energy consumption and noise.
The combination of the filter and the FFU cabinet enables a continuous clean airflow to the cleanroom to meet cleanliness requirements.
Compared with comparable companies at home and abroad, the company's products have better performance in the counting efficiency index after the filtration efficiency level is determined, and the resistance index reflects the performance difference of each company. Under the same level of filtration efficiency, the lower the resistance, the lower the energy consumption and noise.
The company's products are 15%~20% better than their peers in the resistance indicators of each product line of primary-medium-high-efficiency-ultra-high efficiency.
R&D starts with filter materials, and R&D rates continue to grow.
IPO fundraising and R&D platform project, R&D starts with filter materials. The company's IPO fundraising projects include a R&D platform project of 152.554 million yuan. The new R&D center focuses on R&D work on new materials, new technologies, new products, and new applications.
The company's core technology development begins with the filter material formula, and the formula advantages are reflected in:
(1) The adsorption capacity of the filter for gaseous molecular pollutants is stronger;
(2) The adsorption capacity of the material is stronger;
(3) The competitive adsorption effect of water molecules is smaller;
(4) Decompose and transform the adsorbed gaseous molecular pollutants and solidify them inside the filter medium;
(5) Extend the service life of materials (according to the prospectus data, the product life of the company's self-developed formula can reach 1.7~5 times that of foreign imported materials).
Technology-driven business, R&D spending continues to rise.
In 22 years, the company's R&D expenses were +10% year-on-year, and the R&D expenses of 1~3Q23 have exceeded the level of 22 years to 53.03 million yuan, and the R&D rate has risen to 4.9%.
Semiconductor clean rooms have strict requirements for product performance, especially the technical barriers of high-efficiency filter products, and the gross profit margin level can reach 30%~40% under the technical premium.
In the long run, the company can expand its market share by maintaining technological leadership.
The horizontal comparison also shows that the company's R&D investment is leading, and the technology premium is reflected.
The company and the two major domestic comparable companies, Zaisheng Technology and Jinhai Hi-Tech, are both filter manufacturers, but the product application scenarios are different, and the shrinkage of demand for new energy vehicles/construction filter materials has affected the performance of comparable companies.
From the perspective of R&D, the company's main high-grade filter technology iterates faster, and the company's R&D rate continues to rise and is on par with Zaisheng Technology in 1~3Q23. The technology premium is reflected in the gross margin comparison of comparable companies.
2. Historical performance: Benefiting from the prosperity of the pan-semiconductor industry, the logic of consumables has been initially realized
The demand for pan-semiconductors is strong + the logic of consumables is cashed, and the company's performance volume has increased rapidly.
The company's revenue CAGR in 19~22 was 15.7%, and the CAGR of net profit excluding non-attributable to the parent company was 20.0%. In 1~3Q23, the revenue was 1.07 billion yuan, +27.9% year-on-year, and the net profit after deducting non-attributable to the parent company was 130 million yuan, +50.0% year-on-year, and the profit side has exceeded the level of 22 years.
The main reasons for the high performance increase:
(1) Based on the semiconductor industry and the pan-semiconductor industry (photovoltaic, the industry has been actively expanding production in recent years), actively expand the air purification market for biomedicine, industrial emissions, and commercial scenarios, and maintain a high capacity utilization rate/production and sales level;
(2) The proportion of revenue from "consumable products" such as filters with better profitability increased from 21.5% in 19 to 28% in 23 (12M23 investor communication announcement data), and the customer accumulation effect appeared.
Filter products are growing faster than FFU.
As of the 1H22 data disclosed in the company's prospectus, the company's semiconductor industry revenue accounted for 48.3% of the total revenue, which is still the core application scenario, mainly because the semiconductor clean room has higher requirements for product standards such as filtration efficiency grades, and the product price is higher (the value of a monolithic high-efficiency filter is about 530 yuan, which is 10 times that of the primary and intermediate efficiency filter), which is the focus of the company's business development.
Due to the sales of FFU and filters, and the regular replacement of filters, the growth trend of the two core products is consistent, and the revenue growth rate of filters is faster.
Product structure change + overseas expansion brought about the repair of gross profit margin, and rate optimization brought about an increase in profit margin.
The company experienced a decline in gross profit margin in 19~21 years, mainly due to the increase in raw material prices and the price reduction of FFU products/intermediate and intermediate filter products to expand market share.
Since 22, the gross profit margin has been repaired, mainly due to the increase in the sales proportion of filter products with high gross margin, and the 3-year CAGR growth rate of overseas revenue in 20~22 years is nearly 50%, and there is more room for price increase in overseas sales than in China.
In recent years, the company's net profit margin has continued to rise, mainly due to the continuous optimization of the rate during the period.
The repurchase of existing customers saves the cost of new development and the sales rate decreases.
The company's sales rate has decreased from 13.7% in 19 years to 6.6% in 1~3Q23, which is still related to the logic of filter product consumables. Due to the continuous repurchase of existing customers, the early development cost can be saved, which is reflected in the decrease in rates.
3. Looking forward to the future: the three logics promote the rise of volume and profit
Looking ahead, the company's development has 3 major logics:
(1) Expand production capacity to consolidate high-end market share, and open up the market for air purification equipment and low-end filter products in non-semiconductor scenarios, so as to stabilize the risk of demand fluctuations in a single industry.
(2) Use the "consumables attributes" of the filter to exert the accumulation effect and build a first-entry barrier;
(3) Seek overseas expansion.
3.1 Investment logic 1: The reversal of semiconductor demand is imminent, and the release of production capacity matches the rhythm
The demand reversal of the semiconductor industry chain is imminent. According to the data released by the International Semiconductor Industry Association (SEMI) on the 2024 global fab forecast report, global semiconductor production capacity will increase by 6.4% year-on-year in 2024, breaking through the 30 million monthly production mark, of which China's wafer production capacity in 24 years will be the world's largest wafer production capacity with a growth rate of 13%.
The SEMI report notes that in 2H24, the drive of applications such as generative AI and high-performance computing (HPC), as well as the recovery of end-user demand for chips, are the reasons for the accelerated expansion of advanced process and foundry capacity. TSMC expects 24 years to also be a healthier year of growth, with 3nm leading the growth in advanced processes, 5nm demand continuing to be strong, and AI demand being better, with a low base of 23 years that will make the semiconductor market grow by more than 10% in 24 and the foundry market by about 20%.
In 2H23, the wafer foundry industry in Taiwan, China, took the lead in recovery. TSMC's single-quarter revenue in Q3 and Q4 2023 was -10.83% year-on-year and flat year-on-year, respectively, with quarter-on-quarter increases of 13.70% and 14.41%, respectively, and the performance side saw quarter-by-quarter improvement. TSMC's 4Q23 legal statement said that the capital expenditure in 24 years will be between 28 billion ~ 32 billion US dollars (30.4 billion US dollars in 23 years).
The ramp-up of wafer foundry production lines in Chinese mainland has generally slowed down, and performance is still under pressure, but the pace of expansion has not stopped. According to SMIC's 3Q23 announcement, the company's average capacity utilization rate decreased by 1.2 pcts to 77.1%, and the sales revenue in 3Q23 was US$1.62 billion, -10.56% year-on-year and +3.9% quarter-on-quarter. In the first three quarters of 2023, Huahong achieved revenue of 12.953 billion yuan, a year-on-year increase of 5.64%, and a net profit attributable to the parent company of 1.685 billion yuan, a year-on-year decrease of 11.61%.
According to SMIC's announcement, the capital expenditure for the full year of 23 is expected to be revised upwards to about $7.5 billion, and Hua Hong's second 12-inch production line Hua Hong Wuxi manufacturing project continues to advance, indicating that although the performance of the wafer foundry duo is under pressure, it has not stopped the pace of capacity expansion.
The large increase in imported lithography machines from the Netherlands confirms the expansion of domestic memory chip production capacity. On October 17, 2023, the United States issued updated export control rules restricting the shipment of certain models of mid-to-high-end DUV immersion lithography machines to individual advanced chip manufacturing fabs.
According to a report by Semiconductor Industry Watch, the value of key chip-making lithography systems imported by China from the Netherlands jumped by 11M23 by 1050%.
According to ASML's 3Q23 earnings report, China accounted for 46% of sales, and the company sold 105 new lithography machines and seven used lithography machines in the third quarter. According to the data of Qichacha, in October 2023, the second phase of the big fund will join forces with Hefei Xinyi Hesheng and Changxin Xin'an to increase the capital of Changxin Xinqiao by 39 billion yuan.
In terms of the price of wafer foundry, Qunzhi Consulting predicts that with the gradual recovery of the industry, the foundry price of 28/40nm and other nodes will experience a slight decrease in the future. In the future, with the improvement of capacity utilization and price adjustment, the recovery of the wafer foundry industry may be further accelerated.
According to the data of Core Thought, as of 12M23, there are 210 silicon wafer manufacturing lines of 12-inch, 8-inch and 6-inch and below in Chinese mainland (excluding pure MEMS production lines, compound semiconductor production lines and optoelectronic production lines).
According to the data observed by the semiconductor industry, excluding the capacity of foreign-funded expansion, the production capacity of 12-inch, 8-inch and 6-inch wafer production lines under construction and planned to be built or renovated in domestic wafer factories is 1.59 million pieces/month, 520,000 pieces/month and 550,000 pieces/month, respectively, totaling 2.66 million pieces/month (capacity release exists in the cycle).
According to the general calculation of the specific project capacity and clean room floor area information disclosed on the official website of each company, the demand for clean room for wafer fabs/panel factories with a single 10,000 wafer/month production capacity is about 3,400 square meters (the requirements for clean rooms in semiconductor fabs are ISO 3-4, and the requirements for clean rooms in panel fabs are ISO 4-7, and the laying area of the fan filtration unit (FFU) corresponding to different clean room grades is different from the area of the clean room).
Cleanroom FFU (including filter) market space calculation (only domestic fab expansion):
Conclusion: The monthly production capacity of a single 10,000 pieces corresponds to the demand of 3,400 square meters of clean room, and the value of FFU equipment (including filters) of 1200×600mm (2'×4') and 1200×1200mm (4'×4') is 1.306/882,000 yuan, respectively.
According to the above-mentioned industry expansion expectations, it is assumed that domestic wafer fabs will expand production by 2.66 million pieces per month in the future, corresponding to a market space of 3.511 billion yuan/2.37 billion yuan under the specifications of 1200×600mm (2'×4') and 1200×1200mm (4'×4') specifications, respectively.
Hypothesis: 1200×600mm (2'×4') and 1200×1200mm (4'×4') FFU (including filter) are calculated.
According to TOPWELL's data, the cost of FFU (including filter) equipment is composed of equipment costs, electronic control costs, installation costs, and Ceiling Grid fees, respectively, and the corresponding total costs are NT$12,300/NT$16,600 (corresponding to RMB 2,795/3,773), respectively.
With the evolution of advanced processes, the construction cost of wafer foundries caused by the shrinking of chip manufacturing processes has risen rapidly, and the construction cost of wafer fabs per 10,000 pieces of 5nm chips has reached 5~6 times that of 28nm chip fab construction costs.
According to the data of Jiwei Consulting, 20%-30% of the construction cost of the wafer factory is used for plant construction, 70%-80% is used for equipment investment, and the development of advanced processes has also driven the capital expenditure corresponding to the unit capacity, and the corresponding equipment investment per 10,000 pieces of 5nm wafer production line is 3.11 billion US dollars, reaching 2.5 times the equipment investment of the 14/16nm wafer foundry production line under the same capacity.
Positioning high-end cleanrooms. According to data from ASG, the clean room engineering cost is calculated at 10% of the production line, and the clean room cost required for each 5nm production line will reach nearly 2 billion yuan in the future.
According to the China Business Industry Research Institute, China's equipment industry will see an exponential increase in the demand for equipment investment in China's semiconductor industry in the next 10 years.
SEMI pointed out that in 2022, the localization rate of semiconductor equipment in Chinese mainland will be about 30%, but by 2025, the localization rate will reach 50%. SEMI believes that at present, in the field of 28nm and above, China's semiconductor equipment manufacturers have basically achieved full coverage, and the localization rate has reached more than 80%.
In the 14nm process, China's semiconductor equipment manufacturers have also achieved more than 50% coverage, and the localization rate may reach more than 20%.
At present, it is below 14nm, and the localization rate is still very low, probably only about 10%. At present, the shortcomings of domestic wafer manufacturing are advanced processes, especially advanced process equipment of 14nm and below, such as EUV lithography machines, which still need to be broken through.
Under the CHIPS and Science Act, which went into effect on August 9, 2022, the Act sets out "guardrail provisions" that expressly prohibit semiconductor companies from increasing the production capacity of certain semiconductor facilities in China after receiving a U.S. federal government subsidy ("capacity expansion restrictions").
The capacity expansion restriction prohibits the subsidized enterprise or its affiliates from carrying out the following capacity expansion activities within 10 years of receiving the subsidy:
1) For semiconductor production facilities with immature processes, expand their production capacity in China, Iran, North Korea, Russia and other countries by more than 5% by adding clean rooms, production lines or other facilities;
2) For semiconductor production facilities with mature processes, expand their production capacity in China and other countries by more than 10% by adding clean rooms, production lines, or other facilities, unless 85% or more of the production of the production facility will be incorporated into the final product used and consumed in China and other countries. The scope of the US CHIPS Act has been expanded from the front-end equipment of wafer production to clean rooms and other facilities of the production line, and we believe that the localization rate of related wafer fab supporting facilities such as clean rooms will also be further increased in the future.
There is also a need to build clean rooms in the non-semiconductor industry, which accounts for about 50% of the total applications.
The filter requirements are generally on the low and mid-range. The pharmaceutical and medical industry, the food industry, the instrumentation industry, and the fine chemical industry all require the ISO level of the clean room to be above level 5, which is lower than the ISO level of the semiconductor integrated circuit industry level 1~4, but the industry pattern is more dispersed than the high-end market.
The company has completed the coverage of leading semiconductor customers, developed multi-scenario customers, and stabilized the risk of demand fluctuations in a single industry.
Customers in the semiconductor segment contribute about half of the revenue. By 1H22, the semiconductor industry accounted for 48.3% of revenue. The semiconductor industry is a downstream application scenario with the highest requirements for cleanroom filtration efficiency level and the highest product performance requirements, so it is also an area where the company focuses on developing customers, which has covered domestic customers such as Huali Microelectronics, SMIC, Tianma Microelectronics, BOE and overseas customers such as Intel, and has been equipped with SMIC's previous product lines (including SMIC's most advanced 14nm and 28nm processes).
According to the data of the company's prospectus, the company's top five customers in 2021 are China Electronic System Technology Co., Ltd., Sanfa Electromechanical (Shenzhen) Co., Ltd., Tianma Microelectronics Co., Ltd., BOE Technology Group Co., Ltd., and Tianjia Group, with the top five customers accounting for 36.96% of the total revenue in 2021, and the company's top five customers in the first half of 2022 are China Electronic System Technology Co., Ltd., Tianjia Group, and POLYCOOL HTE ENGINEERING SDN BHD, SHANGHAI INTEGRATED CIRCUIT EQUIPMENT MATERIALS INDUSTRY INNOVATION CENTER CO., LTD., AND BEIJING SHIYUAN XIDA ENGINEERING TECHNOLOGY CO., LTD., THE TOP FIVE CUSTOMERS TOGETHER ACCOUNTED FOR 29.98% OF 1H22 REVENUE.
EFU and ultra-high efficiency filter products passed customer acceptance.
According to the prospectus, the development of the first 28nm lithography equipment in China requires an ISO Class 1 (the highest international cleanliness level) clean environment in the lithography machine. To this end, the company has supplied EFU (ultra-thin equipment end with fan filter unit) and ULPA (ultra-high efficiency filter) products, which have been accepted.
The development of customers in other scenarios such as biopharmaceutical, industrial waste gas treatment, and commercial use is carried out simultaneously.
The company has expanded its portfolio of FFU+ filters for clean rooms, as well as air purification equipment for medical, commercial, and industrial dust removal applications.
In the process of the company's transformation from most of the revenue recognized through projects to most of the revenue recognized through the replacement of consumables, it still faces the cyclical impact of the downstream single industry's expansion demand, so the development of multi-scenario applications can help smooth out the risk of demand fluctuations. At present, the company has covered leading enterprise customers in the biopharmaceutical/new energy field such as Kangxinuo, Pfizer, Tongwei, and Guoxuan.
According to the data in the company's prospectus, in 2021, the company's cleanroom revenue from biomedicine and other industries accounted for about 9.2%, and in 1H22, the revenue from biomedicine and other industries accounted for 8.5%.
According to the data announced by the company, in 2021, the application of the pharmaceutical and food industry in clean rooms accounted for 16%, and the company will expand from the semiconductor level with the highest cleanliness standard to the pharmaceutical and food industries in the future, and the downstream market will be broader.
In the future, with the increasing demand for air purification products from downstream customers in industries such as fine chemicals, high-end precision manufacturing, biomedicine, food, commercial buildings and public buildings in addition to electronics and semiconductors, it will also be conducive to the further development of the company's business layout.
Raised and invested in the second phase of Nanjing's new production capacity, started production in 4Q23 and ramped up production capacity in 1Q24.
The company's original production capacity is saturated, and non-standard products such as air purification equipment are preferentially OEM.
According to the company's announcement, 423 million yuan of the company's IPO investment funds were used for the second phase of Nanjing's expansion plan, and it can be seen from the 12M23 investor exchange announcement that 4Q23 has entered the production stage, and the production capacity can reach 1.5 times that of the current Nanjing factory after full production (according to the current historical average unit price, it can contribute about 500 million yuan in revenue increment).
The expansion of production focuses on core products and improves the yield rate by improving the level of automated production, which is expected to match demand and bring incremental performance to the company when the semiconductor industry chain enters the expansion cycle again.
3.2 Investment logic 2: The attributes of consumables are prominent, and there is an accumulation effect
The customer accumulation effect of consumables products is gradually emerging.
Filter products have "consumable properties" and the replacement cycle is related to cleanliness requirements.
The company's filter products are sold together with FFU products, and they need to be replaced when the filter reaches the final resistance or some equipment is aged. Among them, according to the data of the prospectus, the replacement cycle of the junior and medium-efficiency filter (value of about 60 yuan/piece) is 1~6 months, and the replacement cycle of the high-efficiency filter (value of about 550 yuan/piece) is 1~8 years. The frequency of filter media replacement is directly related to the customer's process environment, the cleanliness requirements of the clean room, and the utilization rate of the equipment.
According to grassroots research, the replacement cycle of filter products is differentiated by chip type, generally the replacement frequency of logic chips is greater than that of memory chips, and the lowest frequency is the display panel (the specific replacement frequency varies depending on the actual use environment and frequency).
Therefore, we believe that with the development of advanced manufacturing processes, higher requirements will be put forward for the performance of filter products, and the replacement cycle may be further shortened.
The proportion of consumables revenue has risen, indicating that the accumulation effect of existing customers is emerging. According to the company's prospectus data, by 1H22, the filter replacement revenue accounted for 48.2% and 23% of the product and total revenue, respectively. According to the 12M23 investor communication announcement, replacement revenue has reached 28% of total revenue. The increase in the proportion of replacement revenue reflects the good repurchase rate of consumables, which confirms the excellent product strength and good customer acceptance.
The sales of consumables products reflect high gross profit margins. According to the 12M23 investor communication announcement, the increase in the sales proportion of filter consumables with high gross profit margin (average gross profit margin of 30%~40%, higher than that of FFU equipment of 15~20pct) has brought about the comprehensive gross profit margin repair in the past two years, according to the prospectus data, as of 1H22, the gross profit margin of the company's high-efficiency filter, primary and secondary efficiency filter, electrostatic filter, and chemical filter is higher than the comprehensive gross profit margin level.
Consumable products are sold with low expense rates. The company's sales rate has decreased from 13.7% in 19 to 6.6% in 1~3Q23 (the slight increase in the rate of 1~3Q23 may be related to seasonal factors and the initial distribution demand of new production capacity).
The company has developed MayAir's Internet of Things (IoT) software, monitored the use status of consumables, and completed the replacement in a timely manner. High-efficiency / chemical filter products (100 yuan to 1,000 yuan per piece) are used in the cleanroom environment with the highest ISO level, and the use status of the filter directly affects the yield of the components produced in the workshop, and there is a need for frequent replacement. The company's products come with sensors, which can realize real-time monitoring of the status and ensure timely replacement.
3.3 Investment logic 3: Take advantage of the east wind of capacity transfer and actively "go to sea"
The overseas semiconductor industry cycle is gradually recovering. SEMI expects to invest a record $119 billion in equipment for 300mm fabs in 2026. Global front-end 300mm (12-inch) fab equipment spending will begin to return to growth starting in 2024, following a decline in equipment investment in 2023, with 300mm fab equipment investment expected to reach an all-time high of $119 billion in 2026, according to SEMI.
Strong demand for high-performance computing, automotive applications, and increased demand for memory will drive spending growth.
Affected by changes in the geopolitical and industrial environment, the trend of the semiconductor industry moving to Southeast Asia is becoming more and more obvious.
According to Statista, Southeast Asia accounts for 27% of the global chip packaging and testing market, with Malaysia accounting for about half. Thanks to its geographical location, demographic dividend, manufacturing capacity and fast-growing economy, Malaysia has attracted a large number of international semiconductor manufacturers, including Intel, Infineon, STMicroelectronics, NXP, Texas Instruments, ON and other international semiconductor giants.
According to Malaysia's Ministry of International Trade and Industry, Malaysia has become the sixth largest exporter of semiconductors, accounting for 7% of global trade in semiconductors and 13% in the field of packaging and testing.
Meanwhile, exports of semiconductor products account for 62% of Malaysia's total domestic E&E exports, with a quarter of Malaysia's GDP of US$406.3 billion in 2022 coming from the semiconductor industry. In 1Q23, Malaysia's foreign investment reached US$15.25 billion, nearly doubling year-on-year compared to Q1 2019.
In terms of the company's overseas expansion, the layout of overseas production capacity and the increase in overseas proportion.
The company's products have a complete certification system at home and abroad, and the preliminary work of "going to sea" is fully prepared. Overseas product certification requires more than half a year of certification cycle, the company began to obtain overseas certification system in the early stage of market development, and the main products have obtained FM, UL, AHAM, CE, PSE, CCC and other certification certificates, laying the foundation for "going overseas" expansion.
The scale of overseas revenue increased by 10%+ year-on-year, and the gross profit margin in 22 years was 3pct higher than that of domestic revenue.
The company's overseas headquarters is located in Malaysia, with overseas production capacity corresponding to revenue of RMB 50 million, and full production has contributed about 38% of overseas revenue in 22 years, mainly producing primary and secondary efficiency filters, high-efficiency filters and FFU products, and focusing on the development of pan-semiconductor customers (semiconductor + new energy) in the downstream, which has broken through Intel, ST, Microelectronics and other international semiconductor manufacturers.
As the company's product performance is not inferior to overseas leaders, and the overseas sales price is higher than that of the domestic one, from the gross profit margin data disclosed in 22 years, even if the overseas sales take the cost-effective route, it still has a gross profit margin premium of about 3pct higher than that in China. As a result, the company continues to increase its efforts to "go overseas", according to the 12M23 investor exchange announcement, the company's 23-year new orders accounted for about 15%~20% of the overseas proportion.
MayAir was listed on the AIM market of the London Stock Exchange in May 2015, and in March 2018, MayAir was privatized and delisted from the AIM market of the London Stock Exchange. After the completion of the privatization acquisition, Baoli Jinrui became the sole shareholder of MayAir Group, and Jiang Li took control of MayAir Group.
According to the company's 22nd annual report, Jiang Li, chairman of the company, holds a total of 72,617,900 shares of the company, which is the actual controller of the company, and Ye Weiqiang, general manager of the company, is a Malaysian national holding 10,440,900 shares. The company has 5 core foreign executives, 4 of whom are Malaysian, all of whom have rich working experience in overseas companies. The global background of foreign shareholders and foreign executives lays the foundation for the company to enter overseas markets, especially in Southeast Asia.
The company accelerated its overseas holding and equity participation, and the new production capacity was launched in 1Q24.
Since 2004, the company has successively established MayAir Manufacturing, MayAir Singapore, MayAir Thailand, MayAir Japan Research Institute Co., Ltd., and acquired Circul-Aire Inc., a Canadian company, in 12M22, which is responsible for developing markets in Malaysia, Singapore, Thailand, Japan, North America and other markets.
The company purchased two new overseas factories at the end of 22, and according to the 12M23 investor communication announcement, it is expected to contribute incremental revenue of 150 million yuan after full production (the original production capacity corresponds to revenue of about 50 million yuan).
4. Profit forecast and valuation
4.1 Profit Forecast
FFU+ filter business revenue forecast: the company's fan filter unit (FFU) and filter products of various filtration efficiency levels are the core business.
The recovery in demand drove the growth.
We believe that the reversal of demand in the semiconductor industry chain in 24 years is the biggest driver of the company's performance growth: on the one hand, the performance of downstream overseas leaders has recovered, and domestic leaders have expanded production against the trend, and the core thought tracking data shows that as of 12M23, the total scale of wafer fabs under construction/planning/transformation has reached 2.66 million pieces/month, corresponding to the market space of (4'×4') standard specifications of FFU equipment (including filters) of 2.37 billion yuan, on the other hand, SEMI data points out 22 The localization rate of semiconductor equipment in Chinese mainland is about 30% annually, and it is expected to rise to 50% by 25 years, and there is still room for the improvement of domestic substitution rate under the security pattern.
The release of fundraising capacity matches the downstream rhythm, and we expect 24 years to be the high point of the company's performance growth rate. According to the 12M23 company's investor exchange announcement, both domestic fund-raising capacity and overseas new production capacity will be fully put into operation from 24 years, and part of the production capacity has been gradually released from 4Q23, which can better match the expansion rhythm of downstream semiconductors.
Due to the rhythm of revenue recognition: generally 2-3 months after the customer places an order, some products are shipped and signed to recognize revenue, and some products will only be recognized when the project is completed and accepted (usually the acceptance cycle of large projects is longer, with an average of 6-9 months), 25 years also has a high degree of performance certainty.
The total revenue of the two core businesses in 21/22 will be 9.7/980 million yuan respectively, and we expect the total revenue of the two core businesses to be 11.5/15.6/1.92 billion yuan in 23~25 years, respectively, +16.9%/+35.6%/+23.7% year-on-year.
Other business revenue forecast: The company's other businesses mainly include various air purification equipment products (accounting for 5.2% of total revenue in 21 years, accounting for 33.7% of other business revenue), some filter media, spare parts and dust removal equipment, and the main application scenarios are medical/industrial dust removal/commercial/VOCs treatment.
The total revenue of other businesses in 21/22 was 1.8/250 million yuan, respectively, +94.6%/+38% year-on-year, maintaining high growth under a low base, and it is expected that the company's diversified downstream application scenarios can better match the rhythm of fundraising and production capacity release, and we expect the total revenue of other businesses in 23~25 years to be 2.9/4.1/540 million yuan respectively, +20%/+40%/+30% year-on-year respectively.
Gross profit margin forecast: In 21/22, the comprehensive gross profit margin of FFU+ filter products will be 28.0%/31.1%, the comprehensive gross profit margin of other products will be 20.9%/14.8%, and the comprehensive gross profit margin of the whole business will be 26.9%/27.8% respectively.
We estimate that in 23~25 years, the comprehensive gross profit margin of FFU+ filter products will reach 31.7%/32%/32%, the comprehensive gross profit margin of other products will reach 17.8%/18%/19%, and the comprehensive gross profit margin of the whole business will reach 28.9%/29.1%/29.2% respectively, and the gross profit margin will show an upward trend mainly because:
(1) The scale of overseas revenue expanded, and the overseas gross profit margin was 3pct higher than the domestic average (gross profit margin data by region disclosed in the 22nd annual report);
(2) The demand of existing customers for consumables such as filters is continuous, and the revenue scale of filter products with high gross profit margin level has expanded, and the gross profit margin of filter products is 10~15pct higher than that of FFU on average (12M23 investor communication announcement data);
(3) The scale effect is gradually emerging. The company's core business FFU and filter products are standard products, and with the expansion of production capacity, the scale effect will become more and more prominent;
(4) The expansion of its own production capacity reduces the demand for OEM foundry.
Expense ratio forecast: The company's sales expense ratio in 20~22 years is 8.5%/7.5%/6.1%, and the management expense ratio is 4.0%/3.4%/4.4% respectively. We expect that with the release of new production capacity, we need to increase customer development efforts to digest production capacity in the early stage, and the sales rate will increase, and the sales rate is expected to decrease as the sales proportion of consumables such as filters increases.
The corresponding sales rates for 23~25 years are 6.3%/6.28%/6.25% respectively. The high 22-year management fee rate increase was mainly due to the addition of new office right-of-use assets and office rents and utility fees. Considering that the management expense rate has fallen back to 3.8% in 1~3Q23, we conservatively expect the management expense ratio to remain at 4.2% in 23~25 years.
Profit forecast results: Based on the above forecast results of the company's revenue, gross profit margin and expense ratio, it is estimated that the company will achieve a net profit attributable to the parent company of 1.7/2.4/310 million yuan in 2023~2025.
4.2 Valuation
Give the company 25 times PE in 24 years and give a target price of 44.1 yuan.
It is estimated that in 23~25 years, the company's net profit attributable to the parent company will be 1.7/2.4/310 million yuan respectively. In the selection of comparable companies, the business scope and volume scale are comprehensively considered, and Jinhai Hi-Tech and Zaisheng Technology, which overlap in the filter and clean air equipment business, are selected, and Shengjian Environment, which is also deeply involved in the semiconductor industry and provides process waste gas treatment system solutions.
Comparable companies have a 24-year PE consensus of 19x on average and a median of 17x, and based on our earnings forecasts, the company's current share price corresponds to 20x 24-year PE.
The demand for semiconductors has reversed, the company's production capacity has been released to match the rhythm, and the attributes of filter consumables have brought long-term space. Thus, giving the company a 24-year PE 25x valuation. Based on this, the company is given a target price of 44.9 yuan.
5. Risk warning
Downstream demand is less than expected risk.
From the perspective of the company's revenue structure, the semiconductor industry accounts for about 50%. If the existing production capacity of the semiconductor industry reaches a saturated state at a certain stage in the future, it may lead to a decrease in new investment, or with the intensification of the technological blockade of the mainland by developed countries, some semiconductor core production equipment cannot be successfully put in place, which may affect the landing of new investment. If new investment in the semiconductor industry is hindered or other uncertainties occur, the company's performance may be lower than we expect.
The risk that the ramp-up of new production capacity is less than expected.
In the context of the current self-owned capacity utilization rate is close to 100% and some orders rely on outsourcing, the release of new production capacity at home and abroad is an important guarantee for future performance growth. Some of the production capacity has been put into operation since 4Q23, and if the ramp-up cannot be successfully completed within 24 years due to equipment commissioning or other factors, the company's performance may not be as good as we expected.
Concentration risk of raw material suppliers.
According to the company's prospectus, for the sake of product consistency, the company's fans and glass fiber filter media suppliers are highly concentrated. Fans are mainly purchased through Ebm Beteiligungs-GmbH with 75.4% in 1H22 and glass fiber filter media is mainly purchased through Hollingsworth & Vose Company with 73.6% in 1H22. If there is an abnormality in the cooperation between the company and the above-mentioned suppliers in the future, or there is a major risk in international trade, it is not conducive to the stability of raw material procurement costs, and the company's performance may be lower than our expectations.
Risk of lifting the ban on the company's restricted shares.
The company lifted 17,385,600 restricted shares on November 20, 23, with a total market value of 678 million yuan based on the closing price on November 20, 23, and there is a risk of lifting the ban on restricted shares.
——————————————————
If there is any infringement, please delete it by private message, thank you!
The report comes from [Foresight Think Tank]