CASTECH(002222)：ULTRA-PRECISION OPTICS IS THRIVING

　　Castech is a global leader in nonlinear optical crystals, with a global market share of more than 70% in lithium triborate (LBO) and beta barium borate (BBO) crystals, serving world-leading laser and optical communication device manufacturers. Benefiting from the boom of the laser, optical communication, and virtual reality/augmented reality (VR/AR) industries, the Company is proactively expanding its production capacity to consolidate its competitive advantages. With leading precision optical processing capabilities, the Company has expanded its product mix to the field of laser components, funded the establishment of Zhiqi Photon Technology to develop ultra-precision optics, and continued to facilitate import substitution for laser devices. We are optimistic about the Company’s long-term growth momentum. We assign a target market value of Rmb15bn, implying a target price of Rmb35, and initiate coverage with a "BUY" rating.
　　The global leader in nonlinear optical crystals, with stable growth in operating revenue and ANP.
　　Castech was founded in 1990 by Fujian Institute of Research on the Structure of Matter (FJIRSM), Chinese Academy of Sciences (CAS). After more than three decades of development, the Company has become one of the few suppliers in the industry capable of providing comprehensive one-stop services encompassing “crystals + optical components + laser devices”, with customers spanning leading manufacturers worldwide, including Coherent, Spectra-Physics, Trumpf, IPG, Raycus Fiber Laser Technologies and Han's Laser. In 2022, the Company achieved operating revenue of Rmb768mn (+11.57% YoY), and attributable net profit (ANP) of Rmb226mn (+18.30% YoY), increasing for almost nine years in a row. The robust growth momentum comes mainly from 1) high barrier of optical crystals and the high profitability of the Company; and 2) the continuously enriched product lines from optical crystals to the field of optical components and laser devices, and the expanded downstream applications from the laser and optical communications to semiconductors, automotive electronics, and consumer electronics, etc.
　　Castech's LBO and BBO crystals take up over 70% of the global market share.
　　LBO and BBO crystals are still recognized as one of the best nonlinear optical crystals, which have been used in solid-state lasers for a long time. China's ultraviolet (UV) nanosecond lasers and picosecond & femtosecond lasers shipments have maintained rapid growth, according to the data of National Science Library (Wuhan), CAS “2022 China's Laser Industry Development Report" (cited from BWT Beijing’s prospectus and Delphi Laser’s prospectus), the domestic shipments of UV nanosecond lasers were about 27,000 units in 2021, with a CAGR of 42.2% over 2014-21; domestic shipments of picosecond & femtosecond lasers were about 3,300 units in 2021, with a 108.6% CAGR over 2015-21. Benefiting from the rapid development of solid-state lasers in China, we expect the global market of LBO and BBO crystals for lasers to reach Rmb400mn in 2026. According to the announcement of Castech, the Company has maintained the largest market share in the LBO and BBO crystals, taking up more than 80%/70% market share of LBO/BBO crystals in 2021, respectively.
　　Optical components have wide range of applications, where is easy to produce “single champions”.
　　Optical components have a wide range of applications and rich product lines, based on the statistics from the China Optics and Optoelectronics Manufacturers Association (COEMA), in 2022, China’s optical components market reached Rmb145.5bn. Optical components market presents a differentiated competitive landscape, we believe that manufacturers are easy to build up a competitive “moat” in niche markets, and grow into a “single champion”. From the perspective of precision and technical complexity, ultra-precision optical components are the “jewel in the crown” of the optical components market, mainly used in semiconductors, life sciences and other high-tech industries, Frost & Sullivan expects (cited from the Mloptic’s prospectus) the global market will likely reach Rmb26.8bn in 2026, corresponding to a 14% CAGR over 2022-26. From the perspective of competitive landscape, domestic precision optical enterprises have seized the opportunity of industrial transfer, and gradually narrowed the gap with global manufacturers in product design, manufacturing, testing and other key phases. Based on the data from Frost & Sullivan (cited from Mloptic’s prospectus), the domestic manufacturers’ market share in semiconductors and life sciences reached 6% and 12% in 2021, respectively.
　　Ultra-precision optical components create the second growth curve.
　　The Company has integrated processing capability from raw material synthesis to coating, having mastered all mainstream methods of optical crystal manufacturing, with leading parameters of various optical crystal products. With profound technical accumulation, the Company has gradually expanded its product line to high-end optical components and laser devices, which downstream applications have expanded to optical communications, AR/VR, Lidar, semiconductors, optical testing equipment and other fields. To meet its strategy, the Company invested in the establishment of Zhiqi Photon Technology, focusing on nanometer precision of ultra-precision optical components and complex optical components of the R&D. Meanwhile, the Company is promoting Phase II of the D building construction project, which is likely to expand nearly 40,000 sqm of construction area after the completion of the reconstruction according to the Company’s estimates, to consolidate the competitive advantage in high-end optics field.
　　Potential risks: Intensified market competition; significant increase in raw material costs; loss of core technical personnel; changes in the international environment and trade policies; the progress of production capacity building missing expectation; substantial exchange rate changes; technology leaps and R&D failures.
　　Investment strategy: Castech is a global leader in nonlinear optical crystals and is one of the few suppliers in the industry capable of providing comprehensive full-stack services encompassing “crystal + optical components + laser devices”.
　　Benefiting from the resurgence in industries such as laser, optical communication and VR/AR industries, we expect the Castech’s operating revenue and ANP to maintain rapid growth. Meanwhile, it continues to promote import substitution in the field of high-end optical components,developing ultra-precision optical components, which helps the Company’s downstream applications expansion, opening up the second growth curve.
　　Considering the stable demand of the Company’s optical crystals and components customers, the accelerated process of import substitution for high-end components, we expect its operating revenue and ANP to grow faster and estimate its 2023E/24E/25E EPS at Rmb0.56/0.69/0.86. We chose Mloptic (688502.SH), Optowide Technologies (688195.SH), Advanced Fiber Resources (300620.SZ) and Yongxin Optics (603297.SH) as the comparable companies. Taking the average comps valuation of 84x 2023E PE (based on Wind consensus estimates) as a reference, combined with the discounted cashflow (DCF) valuation methods, we assign 62x 2023E PE to derive a target market cap of Rmb15bn, implying a target price of Rmb35 and initiate coverage with a "BUY" rating.
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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。