KINGSEMI(688037)INITIATION：A LITHO TRACK EQUIPMENT LEADER POISED TO ACCELERATE IMPORT SUBSTITUTION IN 28NM

　　Kingsemi is a domestic leader in coating and developing equipment and single-wafer wet process equipment for the semiconductor lithography process in China. It has broken the monopoly of foreign manufacturers in coating and developing equipment and achieved the full localization of track equipment for the 28nm node and above. Its downstream customers cover top enterprises in various industries, and the cumulative sales of its products exceeded 1,500 units. Kingsemi is in a period of rapid growth, and the new breakthrough in 28nm is likely to allow it to replace Japanese equipment suppliers, pointing to notable elasticity in incremental orders.
　　We initiate coverage with a "BUY" rating and a target price of Rmb307 on 15x 2023E PS.
　　 Rapid earnings growth in the past three years after two decades of technology accumulation in lithography track systems.
　　Founded in 2002 by the Shenyang Institute of Automation, Chinese Academy of Sciences, Kingsemi is a leading manufacturer of domestic semiconductor lithography coating and developing equipment. The Company's products include coating and developing equipment for the photolithography process （accounting for about 60% of the revenue） and single-wafer wet process equipment （accounting for about 30%-40% of the revenue）。 As of Jul 25, 2022, Kingsemi had sold more than 1,500 sets of coating and developing equipment and single-wafer wet process equipment for various fields.
　　Kingsemi is in a period of rapid growth, posting a revenue CAGR of about 58% and a net profit CAGR of about 36% from 2018 to 20213. Its customers cover front-end wafer processing and back-end advanced packaging of integrated circuit （IC） manufacturing, as well as leaders of compounds, micro-electromechanical systems （MEMS）， light-emitting diode （LED） chip manufacturing and other industries, with new product verification and the intake of bulk or repeat orders serving as the driving force of its rapid growth.
An in-depth presence in track/single-wafer wet process equipment and full localization of track equipment for the 28nm node and above.
　　Coating & developing （track） equipment: This is the core product of Kingsemi, which generated revenue of Rmb506mn in 2021 （+114.40% YoY）， accounting for 61.09% of its total revenue. The track equipment produced by Kingsemi has evolved in the following order in terms of the lithography process: i-line　（i-line lithography, which uses ultraviolet light with an exposure wavelength of　365 nanometers for the lithography process）→KrF （krypton fluoride lithography）→ArF （argon fluoride lithography）→ArFi （argon-fluoride immersion lithography）。 According to Kingsemi’s product release event held in Dec 2022, its new product FT （III） 300, which can be used in the 28nm ArFi process, will achieve customer acceptance by the end of 2022. Intended downstream customers cover many well-known domestic logic chip, memory chip and power device manufacturers. Kingsemi expects to achieve bulk orders for this model in 2023. Single-wafer wet process equipment: The Company's wet equipment business generated revenue of Rmb290mn （+280.56% YoY） in 2021, accounting for 34.95% of its total revenue. The business is mainly　　composed of cleaning equipment, glue removers and wet etching machines.
　　Its spin scrubber equipment, the physical cleaning equipment used in the front-end wafer processing of IC manufacturing, has reached the international advanced level in autonomous brushing and scrubbing control technology and has successfully realized import substitution in this field to take the lead in China. Kingsemi is currently developing single-wafer chemical cleaning equipment for process applications below 28nm.
　　Market analysis: Boasting a global TAM of nearly US$9bn, with its domestic market share at about 12% in track equipment.
　　According to Gartner's estimates, Kingsemi's coating & developing/single-wafer cleaning equipment accounted for 3.8%/4.1% in the global wafer manufacturing equipment market in 2022, respectively, with the combined total equivalent to a global total addressable market （TAM） of US$8.6bn in 2022. Track equipment: Japan’s Tokyo Electron accounts for about 90% of the global market. In China, our tracking of bidding data of fabs in China in 2016-22 （per data from chinabidding.mofcom.gov.cn） indicates that Kingsemi has a market share of about 12% in the domestic market. As one of the few domestic manufacturers with high-end in-line equipment mass production and manufacturing capabilities, we expect Kingsemi to continue to benefit from the import substitution of equipment in the future. Cleaning equipment: The global market share of the top four manufacturers in Japan, South Korea and the US has reached 98%. Domestically, our tracking of bidding data shows that Chinese mainland manufacturers have won the bid for 208 units of equipment, implying a localization rate of about 32.6%, of which Kingsemi accounts for 4.5% with single-wafer physical cleaning equipment taking a lion’s share. In the future, with the launch of the Company's chemical cleaning equipment, its market share is likely to further increase.
　　Future presence: Consolidating the edge in track equipment and further expanding production capacity to meet market demand.
　　Kingsemi has been involved in the advanced packaging of IC manufacturing and LED chip manufacturing for many years. With continuous technological innovation, cost-effective products and high-quality after-sales service, it has established a certain reputation in the industry. In addition, Kingsemi will seize development opportunities in front-end processing by increasing R&D investment and enhancing product competitiveness. Its coating & developing equipment and single-wafer cleaning equipment suitable for front-end wafer processing have been verified by customers and put into use in specific processes. The general trend of expanding front-end chip production lines domestically and localizing semiconductor equipment has created historic opportunities for the development of domestic semi equipment companies.
　　Kingsemi raised funds to build high-end wafer processing equipment industrialization projects in 2021, incl. the Shanghai Lingang R&D and industrialization project and the high-end wafer processing equipment industrialization project （Phase II）， which will help boost technology R&D of high-end front-end equipment and expand production capacity. According to the Company’s product release event in Dec 2022, it expects to be able to　guarantee an output value of more than Rmb4bn in 2024.
　　 Potential risks:
　　Disappointing plant expansion of downstream customers or the emergence of excess capacity; supplier supply instability; new product commercialization missing expectations; increased market competition; increased international trade friction; change in tax incentives; change in government subsidies.
　　 Investment recommendation:
　　As a domestic leader in semiconductor coating & developing and wet process equipment, Kingsemi has strong technical strength and vast headroom for growth with its revenue remaining modest. We forecast 2022E-24E revenue of Rmb1,347mn/1,905mn/2,626mn. At present, Kingsemi is in the stage of high R&D investment, and its short-term profit margin is likely to remain low, though long-term profit elasticity looks plausible, which should justify our priority to sales revenue in valuation. We use the PS-based relative valuation method to value the Company. As of Feb 14, 2023, comparable companies like NAURA Technology （002371.SZ）， AMEC （688012.SH）， ACM Research Shanghai （688082.SH）， Piotech （688072.SH） and Hwatsing Technology （688120.SH） are trading at average PS of 10.3x （based on 2023E Wind consensus estimates）， which is significantly lower than the average PS of 18.3x for these semiconductor equipment companies in the past three years.
　　After incorporating the absolute valuation result under the discounted cashflow （DCF） method, which puts the reasonable market cap at Rmb29.1bn, we assign 15x 2023E PS to derive a market cap of Rmb28.6bn, equivalent to a target price of Rmb307, 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。