In 1H23, Uigreen Micro's earnings were under pressure, mainly due to the slowdown in demand from end-users and customers, as well as the Company's continued expansion of new products, which led to a large increase in expenses. Looking ahead, the Company will continue to promote domestic substitution in high-end wafer-level and substrate-level semiconductor test probes, and the relevant customer validations are in progress. Meanwhile, the Company is expanding the application of microelectromechanical system (MEMS) components in consumer electronics, robotics, automobile and other fields. Considering the loss of 1H23 earnings, we adjust our 2023E/24E/25E EPS estimates to Rmb0.03/1.05/2.24 (vs previously Rmb1.25/2.03/2.72). Taking comps valuation as a reference, considering that the Company's semiconductor test probe business has greater growth space in product lines and market development, we assign 65x 2024E PE to derive a target price of Rmb68 (vs previously Rmb95) and reiterate the "BUY" rating.

1H23 earnings were under pressure, missing our expectation.

On Aug 30, the Company released the 1H23 earnings report. In 1H23, it achieved operating revenue of Rmb98mn (-41.51% YoY), attributable net profit (ANP) of Rmb-17mn (turn a profit into a loss), respectively. The Company's earnings missed market expectations, and we believe it is mainly due to the following: 1) As the demand in the consumer electronics market has slowed down, the Company's customers’ high inventory levels have reduced procurement, and intensified market competition result in a low level of backlog orders for the Company, and product gross margins are also under pressure. 2) The Company's R&D expenses in 1H23 totaled Rmb37mn (+62.49% YoY) due to its focus on semiconductor test probes development. According to the Company's announcement, the planned R&D investment for its MEMS probe for wafer test R&D project and substrate flying probe R&D project is Rmb79mn.

High R&D investment to consolidate technological advantages, and product line expansion to open up growth space.

In the face of market demand slowdown and other unfavorable factors, the Company cultivates internal skill, constantly increases R&D investment in the semiconductor test probes and MEMS components, and consolidates technological advantages in the fields of micro metal manufacturing, micro mold design, and micro-complex structure processing. According to the Company's announcement, it conducts R&D in the automobile, robotics, consumer electronics and aviation and other fields. The research projects include gearbox components, shields for stacked 3D packages, stacked 3D packaging, high-end periscope openwork camera module motor housing and round aviation connector. With industry-leading precision and complex structure processing capabilities, the Company will continue to expand its business to high-growth track and enrich its product matrix to open up the growth ceiling.

Semiconductor test probe business has great potential for development, and the R&D project continues to promote domestic substitution.

According to VLSI Research and JW Insights, the global probe card market size reached US$2.6bn in 2022. The domestic substitution opportunities are huge in the Chinese mainland, since the top 5 probe card manufacturers in the world all come from overseas, occupying about 70% of market share. The Company is building the private placement projects in an orderly manner, actively advancing R&D in the fields of high-end substrate flying probe, MEMS probe for wafer test, ultra-high-frequency probes and socket. According to the Company's announcement, it has obtained the customers’ validation claims for MEMS probe for wafer test, and the ability to mass-produce flying probe, whose minimum size is 30um OD, with various head types that have a minimum length at 5mm. The Company’s flying probe performance can reach the Japanese and South Korean technical requirements of the same specifications.

Potential risks:

Technology and product upgrades; high customer concentration; new product development missing expectations; production capacity launch missing expectations; trade disputes; brain drain; intensified market competition; loss in earnings.

Investment recommendation:

The Company is a leading manufacturer in the field of MEMS components and semiconductor test probes in China, with the leading yield rate, manufacturing precision and production capacity and other indicators. In 1H23, its earnings were under pressure, mainly due to the slowdown in demand from end-users and customers, as well as its continued expansion of new products, which led to a large increase in expenses. Looking ahead, we expect that the Company will maintain high R&D investment to consolidate its technological advantages in the field of precision machining, promoting domestic substitution in high-end wafer-level and substrate-level test probes. Relevant customer validations are in progress. Meanwhile, the Company is expanding the application of MEMS components in consumer electronics, robotics, automobile and other fields. Considering the Company’s increase in R&D expenses of new products and loss of 1H23 earnings, we adjust our 2023E/24E/25E EPS estimates to Rmb0.03/1.05/2.24 (vs previously Rmb1.25/2.03/2.72). We take the Wind consensus valuation estimates of 45x 2024E PE for comparable including Fortune Precision Equipment (688409.SH) and Memsensing Microsystems (688286.SH) as a reference, considering that the Company's semiconductor test probe business has greater growth space in product lines and market development, we assign 65x 2024E PE to derive a target price of Rmb68 (vs previously Rmb95) and reiterate the "BUY" rating.