JIANGSU PACIFIC QUARTZ(603688)：HIGH-PURITY QUARTZ SAND PIONEER WITH QUALITY RESOURCES AND PURIFICATION CAPABILITIES

　　Investment positives
　　We initiate coverage on Jiangsu Pacific Quartz Co., Ltd. (JPQC) with an OUTPERFORM rating and a target price of Rmb151 (implying 25x 2023e and 18x 2024e P/E), with 16% upside.
　　Why an OUTPERFORM rating?
　　We expect solar-grade high-purity quartz sand to be in short supply in 2023. We believe scarcity of quartz sand for inner layer of crucibles could become more visible.
　　In our view, the prospects for the high-purity quartz sand market remain promising in 2023. We estimate market demand could be 39,000t for quartz sand for inner layer of crucibles, and 59,000t for quartz sand for crucibles’ mid and outer layers.
　　We expect supply to be about 33,000t for quartz sand for inner layer of crucibles and 57,000t for quartz sand for crucibles’ mid and outer layers in 2023, as overseas supply addition could be limited and capacity expansion pace in China will be influenced by JPQC (a pioneer in China’s high-purity quartz sand market).
　　It is uncertain when new facilities at other domestic firms may start production. We believe these facilities will mainly produce quartz sand for mid and outer layers of crucibles rather than that for inner layer. As such, we think scarcity of quartz sand for inner layer of crucibles could become more visible, and its prices have further upside potential.
　　JPQC is a pioneer in China’s high-purity quartz sand market, with high-quality resources and strong purification capabilities.
　　We believe the market has two barriers to entry: Quality of quartz sand ore and purification technology. If quartz sand ore is poor quality, companies are unlikely to leverage processing technologies to offset the resulting negative impact. Global premium quartz sand mines now include Spruce Pine in North America (mainly supplying to Unimin and The Quartz Corp (TQC)) and a mine in India (mainly supplying to JPQC). We think high-purity quartz sand firms need to develop purification technologies that suit quartz sand ore. JPQC owns core patents for key processes, reflecting its years of R&D experience.
　　JPQC has secured quartz sand ore resources earlier than rivals and it has developed relevant purification technologies, which we think enable it to expand capacity more efficiently than peers. Thus, JPQC enjoys relative advantages in output expansion, in our opinion. We expect China’s high-purity quartz sand market to maintain a tight balance in 2023 and supply shortage to ease somewhat in 2024. We think average prices may stay high relative to levels seen before 2021.
　　JPQC focuses on R&D of quartz materials for semiconductor applications.
　　The firm’s quartz materials include quartz tubes and rods for light sources, optical fiber and semiconductors. Quartz materials for semiconductor applications have higher unit value and certification thresholds than other materials. JPQC has met certification requirements from Tokyo Electron Limited (TEL) (diffusion) and Lam Research (etching). It is making a progress in meeting the requirements from Applied Materials (AMAT). We believe these efforts help JPQC enter supply chains of global semiconductor firms.
　　Compared with its rival Feilihua, JPQC has built a sound product portfolio, but its scale remains small. We think its quartz tube and rod business may benefit from steadily rising sales volume and unit value as its 6,000t electronics-grade quartz material project, which is currently at production stage, contributes additional sales volume.
　　How do we differ from the market? We believe the quartz material market has barriers to entry in terms of both resources and purification. We do not believe investors should be overly pessimistic about quartz sand prices and sustainability of the firm’s advantages.
　　Potential catalysts: Quartz sand prices may still rise after photovoltaic (PV) demand recovers.
　　Financials and valuation
　　We expect the firm’s 2022-2024 EPS to be Rmb2.83, Rmb6.09, and Rmb8.41, respectively, implying a CAGR of 72%. The stock is trading at 21x 2023e and 16x 2024e P/E. We initiate coverage with an OUTPERFORM rating and a target price of Rmb151, implying 25x 2023e and 18x 2024e P/E with 16% upside.
　　Risks
　　Stability of quartz sand ore supply chain disappoints; the firm’s capacity expansion is slower than expected; overseas capacity expansion is faster than predicted.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。