Both Engineering has been deeply engaged with cleanroom industry for 30 years, providing integrated solutions for cleanroom systems to the high-tech sector. With multiple advantages of customers, technology, management, project experience and so on, it has greatly benefited from the development of the downstream industries like semiconductor and displays. As related industries continue to grow, coupled with the Company’s active expansion in the secondary distribution business and the development of prefabricated electromechanical construction, its project undertaking and order transformation are likely to further accelerate. We estimate its 2023E/24E/25E net profit at Rmb254mn/324mn/391mn by combining with the two valuation methods of PE and discounted cashflow (DCF), and put the target price at Rmb17. We initiate coverage with a “BUY” rating.

Company profile: Domestic cleanroom engineering leader with 30-year experience.

Both Engineering provides cleanroom integrated solutions in the high-tech industry, with its main downstream customers being in the semiconductor and new display industries. It covers the high-end segments of the cleanroom industry and holds a leading position in terms of technology and brand. The Company's revenue is closely related to project milestones. In the past year and 1Q23, the downstream customers have gradually invested in accordance with market demand and changes, leading to a relative slowdown in industrial production, which resulted in limited overall revenue growth in 1H23.

However, we expect that 2H23 will gradually see an increase in downstream market demand, with which, we anticipate that the Company's project acquisition and order conversion will accelerate.

Industry overview: A “pyramid” competitive structure with relatively few mid-to-high-end players.

Cleanrooms provide a controlled environment for laboratories or factories to meet specific cleanliness requirements. In downstream applications, the semiconductor cleanroom requirements have reached the highest levels and beyond, and the electronics industry accounts for the largest market share in the cleanroom market (reaching 38.01%). In terms of investment, although the proportion of cleanroom investment to the total factory investment is not high, estimated at around 10%-15% (with equipment accounting for 50%), it has a significant impact on the normal operation of equipment. Once problem occurs, it will result in losses that are difficult to estimate, and the margin for error is low. Therefore, in the mid-to-high-end cleanroom sector, represented by semiconductors and panels, cleanroom buyers tend to choose top-tier companies in the industry with rich project experience and long-term cooperative relationships.

Industry drivers: Booming production capacity in semiconductor sector, and uptrend demands in various fields.

In the semiconductor field, in the short term, semiconductor production capacity, primarily focused on mature processes, is active with several major　　projects planning for production. In the long term, Statista predicts that by 2027, the Chinese semiconductor market will reach US$293.5bn, corresponding to a 7.8% CAGR over 2023-27. However, according to IC Insights data, in 2021, China's self-sufficiency rate in integrated circuits (ICs) was only 16.7%. Recently, the US has further tightened restrictions on chip exports. On Oct 17, the US Department of Commerce's Bureau of Industry and Security (BIS) announced new export control rules for advanced computing chips and semiconductor manufacturing equipment, limiting China's capability to purchase and manufacture high-end chips. Additionally, certain Chinese GPU companies and their subsidiaries have been included in the Entity List, therefore, the domestic semiconductor rely more on localization and likely see increase in self-sufficiency rate. In other application areas, the pace of large-scale panel projects continues, with a focus on high-end technologies. Furthermore, industries like pharmaceuticals, biotechnology, food and beverages, and new energy are experiencing a sustained increase in demand. According to data from the China Institute of Electronics and Intelligence Research, the cleanroom industry is likely to maintain high-speed growth with a 15.01% CAGR over 2016-26. Considering the acceleration of import substitution of semiconductors in this round, we anticipate that the short-term overall demand for the cleanroom industry may increase at an even faster pace.

Company advantages: Experience-oriented and multiple edges driving the Company upward.

There are few players in the field of mid-to-high-end cleanroom segment, and cleanroom customers tend to cooperate with enterprises with relevant experiences. Both Engineering has accumulated rich project experience during its nearly 30 years of development, which helps it to get orders in cleanroom projects from the high-tech industries. In addition, the Company as one of the few domestic enterprises positioned in the construction of high-end cleanrooms, its quality of operation outperforms the industry. Meanwhile, as the Company actively ventures into the high-margin secondary distribution business and pioneers to the prefabricated electromechanical constructions, its overall operating quality and market share are likely to achieve considerable improvement.

Potential risks: Less-than-expected domestic semiconductor investment; price increases in cleanroom raw materials; less-than-expected cleanroom demand; new industry entrants; instable overseas policies; invested projects not up to expectations.

Investment strategy: Considering Both Engineering’s relatively low market share in the relatively prosperous cleanroom industry, implying a great headroom for improvement, we estimate the Company's attributable net profit (ANP) at Rmb254mn/324mn/391mn in 2023E/24E/25E, respectively, corresponding to growth increases of 1.2%/27.6%/ 20.6%, respectively. Taking 2023 as the discounted base year, we adopt DCF valuation and arrive at a reasonable equity value of Rmb8.897bn, corresponding to a share price of Rmb17.03.

Taking comparable companies Acter Technology Integration (603163.SH), L&K Engineering (603929.SH) and Sed Industry (000032.SZ) as comparable companies which are trading at an average valuation of 33.6x 2023E PE per Wind consensus estimates as references, we set a target price of Rmb16.3.

By combining both DCF and PE valuation results, we arrive at a target price of　Rmb17 for the Company and initiate coverage with a "BUY" rating.