20220214-招银国际-深南电路-002916.SZ-Substrate_demand_remains_strong_in_2022_5页_901kb

Shennan Circuits (002916 CH) Company Update Summary

Core Content Overview

Shennan Circuits (002916 CH) has raised RMB2.55bn through a private placement, with key participants including the National IC Industry Investment Fund. The funds are allocated to expand high-end flip chip IC substrate manufacturing. Despite strong demand for substrates, the new capacity is not expected to contribute significantly until the end of 2023. The company currently maintains a HOLD rating with a target price of RMB110.75.

Key Information

Financial Highlights

• Revenue: Expected to grow steadily, reaching RMB17,668mn in FY23E.
• Net Profit: Projected to increase to RMB2,200mn in FY23E.
• EPS: Expected to rise to RMB4.47 in FY23E.
• Net Profit Margin: Improved to 12.5% in FY23E.
• Gross Margin: Maintained at 25.7% in FY23E.
• Operating Margin: Expected to be 13.8% in FY23E.
• ROE: Projected to be 19.2% in FY23E.
• PE Ratio: 21.9x in FY23E.
• PB Ratio: 4.2x in FY23E.

Capacity Expansion

• PCB Capacity: Currently around 200w sq m/year. New capacity includes a Phase II plant (58w sq m) in Jiangsu and a Phase III plant (expected to begin production in 4Q22).
• Substrate Capacity: Currently 30w/year. New capacity includes Wuxi (60w, high-end substrates) and Guangzhou (200mn FC-BGA and 3mn panel RF/FC-CSP), with Guangzhou production expected to begin in 2023.

Market Position

• The company's existing substrate capacity is fully utilized, driven by strong semiconductor demand.
• IC substrate supply is expected to remain tight in 1H22, with BT substrate likely to be in short supply, while ABF substrate supply may fall short throughout 2022.

Shareholding Structure

• AVIC International Holdings: 67.06%
• HK Securities Clearing: 2.60%
• China Asset Management Co: 0.90%

Stock Performance

• Market Cap: HK$56,282mn
• 12-Month Price Performance: Not provided in text, referenced via image.
• Share Performance (3M):
  • Absolute: 6.1%
  • Relative: 11.9%

Risk and Valuation

• Upside Risks: Faster-than-expected decline in material costs, higher-than-expected 5G infrastructure spending, and consumer demand.
• Downside Risks: Potential for slower-than-expected demand growth or supply chain disruptions.
• Current Price: RMB115.05
• Target Price: RMB110.75
• Up/Downside: -3.7%

Main Points

Demand and Supply

• Substrate demand remains robust, with Shennan Circuits' existing capacity fully utilized since 2020.
• IC substrate supply is expected to stay tight in 1H22, particularly for BT substrates, and ABF substrates may face shortages throughout 2022.
• New capacity will not significantly impact revenue until 2023/24E.

Financial Health

• Cash Flow: Strong operating cash flow is projected, with net cash from operating activities reaching RMB2,748mn in FY23E.
• Balance Sheet: Total assets are expected to increase to RMB21,817mn in FY23E, with a rising current ratio (1.8x) and improving liquidity.
• Debt/Equity: Net debt to total equity remains low, at 10.5% in FY21A.

Valuation

• The stock is considered fairly valued at the current price of RMB115.05, with the target price of RMB110.75.
• The company is currently rated HOLD, suggesting a potential return of +15% to -10% over the next 12 months.

Key Ratios

• Gross Margin: Stabilized at 25.7% in FY23E.
• Operating Margin: Expected to be 13.8% in FY23E.
• Net Profit Margin: Projected to reach 12.5% in FY23E.
• ROE: Projected to be 19.2% in FY23E.
• ROA: Expected to be 10.1% in FY23E.
• EPS: Projected to be RMB4.47 in FY23E.
• DPS: Expected to be RMB1.45 in FY23E.
• BPS: Projected to be RMB23.29 in FY23E.

Analyst Notes

• The research is conducted by Lily Yang, Ph.D., Alex Ng, and Lana Lin.
• The report maintains a HOLD rating, citing that the positive news have already been priced in and the stock is fairly valued.
• The report includes various financial and operational metrics, as well as a detailed capacity schedule.

CMBIS Ratings

• BUY: Potential return of over 15% over next 12 months.
• HOLD: Potential return of +15% to -10% over next 12 months.
• SELL: Potential loss of over 10% over next 12 months.
• NOT RATED: Not rated by CMBIS.
• OUTPERFORM: Industry expected to outperform the market.
• MARKET-PERFORM: Industry expected to perform in-line with the market.
• UNDERPERFORM: Industry expected to underperform the market.

Disclaimer

• This report is for informational purposes only and does not constitute investment advice.
• The information may be subject to change and is not guaranteed.
• CMBIS is not liable for any loss or damage arising from reliance on this report.
• The report is not an offer or solicitation to buy or sell securities.
• It is intended for use by the intended recipients only and may not be reproduced or distributed without consent.

Conclusion

Shennan Circuits has raised significant capital for capacity expansion in high-end IC substrates, with new projects expected to come online in 2023. Despite strong demand, the new capacity will not significantly impact earnings until the end of 2023. The company is currently fairly valued and rated HOLD. Investors should consider the risks and consult professional advisors before making any investment decisions.