CCL and PCB industries faced ongoing challenges that added pressure on Shengyi Tech’s performance. The Company’s 1H23 revenue/NP to shareholders declined by 15.9%/ 40.7% YoY to RMB7,880mn/ RMB555mn. GPM fell to 19.3% in 1H23 vs. 23.4%/20.5% in 1H22/2H22. Looking forward, we expect modest sequential growth in 2H23, as the mgmt. mentioned recent operations of CCL products were running on full capacity. However, we think investors should wait for a clearer signal of full recovery of the downstream demand, which would support revenue growth and margin recovery. Maintain HOLD, with adjusted TP of RMB16.1, based on 20x rollover 2024E P/E.

Industry downcycle weighs on the Company’s performance. The worldwide PCB market experienced a significant decline of 20% YoY in 1H23. The falling demand hurt more on the ASP side (CCL/PCB: est. high- teens /low-teens in price change) as sales volume was relatively resilient. Even though the inventory level of some downstream clients is relatively low, they were reluctant to purchase materials. We saw the industry is consolidating through our channel checks, which has suppressed the willingness to pull up inventory.

Shengyi Tech is better-positioned than its peers with operations on full capacity; however, the market is waiting for a clearer signal of demand return. Per Prismark, the Company ranked second globally in terms of CCL sales with 12% market share globally and with a broad end market coverage. The mgmt. also mentioned operation of CCL business is already at full capacity. There are spot lights on auto, mainly EV, and server market. However, a broader market demand is still weak. Meanwhile, copper price has increased recently and the Company was unable to pass down the incremental cost under the current circumstances, which would further hurt the Company’s GPM in the near term.

We cut FY23/24E revenue and NP forecasts by 6%/8% and 26%/21%, as the Company’s 1H23 results were lower than our expectations and the GPM compression in downcycle is longer-than-expected. We think near-term pressure would persist, but Shengyi Tech should have modest sequential growth in 2H23 from a low base. Maintain HOLD, with TP adjusted to RMB16.1, based on the same 20x rollover 2024E P/E, as the market is waiting for a clear sign of demand recovery and up-cycle.