Company Profile Shenzhen Qingyi Photomask Ltd is a China-based company mainly engaged in the research, design, production and sales of photomask. The Company's main products include quartz photomasks, soda photomasks and others. The company's products are mainly applied to flat panel display, semiconductor chips, touch, circuit boards and other industries, and it is committed to satisfying the demands in the markets of integrated circuit （IC） bumping, IC foundry, IC substrate, micro light emitting diode （LED）， and micro-electro-mechanical systems （MEMS）。 （Source: FT）

Event

Recently, Shenzhen Qingyi Photomasky （“the company”） released its financial results for the third quarter 2022.

From Q1 to Q3, 2022, the company achieved CNY 547 million and CNY 69 million in revenue and net profit attributable to shareholders respectively, a year-on-year （YoY） growth of 41.46% and 123.27%.

For Q3, 2022, the company reported a revenue of CNY 206 million, up 28.95% YoY and 6.40% QoQ respectively. The company’s net profit attributable to shareholders came in at CNY30 million in Q3, up 193.82% YoY and 17.29% QoQ.

Comments

As the photomask sector is booming and the company’s Hefei plant scales up its production capacity, its performance grows robustly.

As the panel photomasks become counter-cyclical, panel factories ramp up the development of more new products in order to improve the capacity utilization.

As a result, the demand for photomasks has increased significantly, and the company’s Hefei factory continues to ramp up its capacity. Driven by the rapid　　production expansion of downstream manufacturers, the prosperity of IC photomasks is on the rise.

The company’s Q3 revenue reaches CNY 206 million, an increase of 6.40% from the previous quarter, mainly driven by the recovery of IC photomasks in its Shenzhen factory and the climbing of the production capacity for panel photomasks in its Hefei factory.

As the company’s Hefei plant ramps up its capacity rapidly, the company’s profitability continues to improve.

The company’s Q3 gross profit margin reaches 26.13%, an increase of 3.33 pps YoY and 1.45 pps QoQ, showing continuously rapid improvement of profitability in Q3, mainly due to the climbing of capacity in its Hefei plant. The Hefei plant registered a loss of CNY10.54 million in Q3, 2021 but made a profit of about CNY 9.42 million in Q2, 2022 and CNY 14.51 million in Q3, 2022.

In terms of expenses, with the rapid expansion of sales volume, the company’s Q3 sales, management and R&D expense ratios decreased by 0.70 pps, 0.59 pps and 1.63 pps year-on-year, respectively.

Amid the boom of photomasks for panel displays and semiconductors, there is great potential for domestic substitution.

The panel mask has a market size of about CNY 5 billion to CNY 6 billion, of which the company accounts for a share of 5%-10%, and there is still more growth potential to come. With the introduction of new lithography machines, the sales will continue to expand.

The company’s IC mask market reaches about USD 5 billion and is on the rise.

The third-party market makes up for 35%, which mainly focuses on mature processes. As the sector continues to boom and the prices increase, overseas leaders such as Photronics and TMC have been outperforming expectations.

After smooth customer certification for its 180nm products, the company is advancing the process R&D for its 130nm-65nm products and the process planning for its 28nm products, which open huge potential for domestic substitution. With the final cleaning and testing equipment in place, the company’s bottleneck in IC mask capacity will also be removed, which will facilitate its strong growth.

Earnings forecast and investment recommendation We maintain our previous earnings forecast of the company’s net profit attributable to shareholders at CNY 98 million, CNY 162 million and CNY 241 million for 2022, 2023 and 2024, respectively, implying a PE ratio of 48.5x, 29.3x and 19.7x respectively, based on the closing price on October 19, 2022.

We maintain the rating of “Outperform”。

Potential risks Intensified competition landscape; slower-than-expected progress of IC mask development.