Investment positives

We initiate coverage on Suzhou Good-Ark Electronics Co Ltd （Good-Ark） with an OUTPERFORM rating and a target price of Rmb17.34, implying 41x 2023e P/E.

Why an OUTPERFORM rating

Domestic silver paste leader likely to gain market share amid rapid demand growth. Good-Ark has gained extensive expertise in independent research since it entered the silver paste market in 2011. In 2020, the firm acquired a minority stake in Silver Materials. In 2021, its silver paste capacity reached 500t. We expect the market for silver paste used in solar cells to be Rmb29.1bn in 2026, and the localization rate to continue to increase. As a result, we believe that leading silver paste providers will likely gain market share and realize import substitution on the back of technological advantages and sound production capacity. .

Diversified product portfolio; verification of downstream clients proceeding rapidly. At present, Good-Ark’s product portfolio includes front- and back-end silver pastes for monocrystalline and multicrystalline passivated emitter and rear contact （PERC）， silver pastes for TOPCon batteries and low-temperature silver pastes for heterojunction （HJT） solar cells. It is also developing cutting-edge technologies such as silver-clad copper technology. In 2020, it completed transformation in silver paste products business and developed its clientele. Its products have entered the testing stage and have been provided to strategic clients such as Tongwei and JA Solar Technology. In addition, its HJT low-temperature silver pastes have been mass produced and delivered. We think that the firm outperforms most global peers in the industry.

Benefiting from robust demand and technological strengths. Good-Ark is a leading semiconductor rectifier diode supplier, and is engaged in the R&D and production of discrete devices, power diode, and integrated circuit （IC） packaging and testing. The discrete devices, power diode, and IC packaging and testing markets have traditionally been dominated by overseas companies. However, COVID-19 resurgence has weighed on supply of overseas companies. In addition, demand for electrical equipment from downstream alternative-fuel vehicle （AFV） and new energy-based power generation sectors continues to increase amid the shift to new energy. We expect Good-Ark to benefit from the import substitution trend and penetrate into the supply chains of medium-range and high-end automotive electronics manufacturers, expanding customer base and application scenarios.

How do we differ from the market? The market is concerned that it may be difficult for Good-Ark to win orders from mainstream cell manufacturers, as it mainly uses domestic silver powder. In our opinion, import substitution is the main market trend in the photovoltaic （PV） value chain. Amid the rapid development of PV, cell manufacturers may expand their verification scope. Considering that Good-Ark has upgraded its silver paste products on the back of its R&D capability, we expect it to grow rapidly after win customer recognition.

Potential catalysts: Customer recognition of Good-Ark’s products proceeds faster than we expect.

Financials and valuation

We estimate that the firm’s 2022 and 2023 EPS will be Rmb0.33 and Rmb0.42, and its attributable net profit over 2022-2023 will reach Rmb268mn and Rmb342mn, implying a CAGR of 30.5% for 2021A-2023E. We initiate coverage on Good-Ark with an OUTPERFORM rating. Adopting an SOTP valuation methodology, we assign valuations for its silver paste business at 50x 2023e P/E and for the semiconductor business at 25x 2023e P/E. And we assign valuations for it 44.6x 2022e P/E and 34.9x 2023e P/E. Its market cap should be Rmb14bn, implying a TP of Rmb17.34 with 17% upside.

Risks

Credit risk related to accounts receivable; disappointing sales of HJT; intensifying competition weighs on GM.