As overseas production capacity expansion missed expectations, and domestic small and medium-sized enterprises (SMEs) are mainly supplying mid- and outer-layer sand, we expect that the price of mid- and inner-layer sand to remain high in 2024, and the commissioning of Pacific Quartz's (high-purity sand) phase II project will support the Company’s earnings to increase further. As its semiconductor business continued to grow, the Company's market share increased to some extent and its product structure optimized continuously. Considering that Pacific Quartz shows an upward trend in earnings and its static PE valuation has been optimized to 5x-6x, we reiterate the "BUY" rating.

1-3Q23 earnings up by 638.32% YoY.

For 1-3Q23, Pacific Quartz posted revenue/attributable net profit (ANP) of Rmb5.9bn/4.207bn (+378.27%/+638.32% YoY), respectively. In 3Q23 alone, the Company achieved revenue/ANP of Rmb2.466bn/1.776bn (+359.51%/531.40% YoY), with earnings at the center of preannounced interval.

Photovoltaic (PV) high-purity sand price rose slightly and slowly, and the commissioning of new project in 4Q23 may bring growth increments.

In terms of production and sales of PV high-purity sand, Pacific Quartz's production capacities are fully booked at present, and we estimate that its 2Q23 production and sales volumes fluctuated little from the previous quarter.

The Company announced that the phase II of its 60ktpa high-purity sand project will be commissioned gradually in 4Q23, which will further boost the Company's production and sales of high-purity sand. In terms of price, with recovery in downstream operating rate and the production of N-type silicon wafers, the supply of high-quality quartz sand continued to be tight, and the price of inner-layer sand rose slightly and slowly in 3Q23. As the overseas production capacity expansion missed expectations, and domestic SMEs are mainly supplying mid- and outer-layer sand, we expect that the supply gap of mid- and inner-layer sand in 2024 will be mainly filled in by Pacific Quartz's phase II project. Against such a backdrop, the price of mid- and inner-layer sand will remain high in the future.

Rapid growth of semiconductor business and higher profitability.

Pacific Quartz has mastered electric melting, gas melting and continuous melting technologies. In 2019, the Company successfully passed the certification by Tokyo Electron for high-temperature diffusion, becoming the third company in the world and the only company in China that passed the semiconductor high-temperature certification. After that, Pacific Quartz also successively passed certification by Lam, AMAT and domestic manufacturers in the US and other domestic manufacturers. After taking small-batch orders in previous years, the Company's product quality and production stability have been continuously recognized by customers. Even amid sluggish industry demand in 2023, Pacific Quartz's revenue from semiconductor business has grown rapidly. As the Company's 6ktpa electronic-grade quartz project is likely to reach full production in 2023, we expect its revenue from semiconductor　　business to maintain a growth rate of more than 50% in the future. Meanwhile, high-end semiconductor products are accounting for a higher and higher proportion in Pacific Quartz's total sales. As its product structure optimizes, Pacific Quartz's profitability may continue to rise.

Potential risks: Lower-than-expected PV and semiconductor demands; the progress of the commissioning of the Company's new production capacity not up to expectations; intensified competition on the industry supply side; the expansion of overseas production capacities exceeding expectations.

Earnings forecast, valuation and rating: Considering the tight supply of high-purity sand and the continuous growth of Pacific Quartz's earnings from semiconductor business, we slightly raise our 2023E EPS forecast to Rmb16.73 (from Rmb15.45) and maintain our 2024E/25E EPS forecast of Rmb28.36/35.97. With the approximate 10x 2023E PE (Wind consensus estimates) of Ojing Science & Technology (001269.SZ), which is in the downstream of the value chain, as a reference, we assign the Company 10x 2023E PE to arrive at a target price of Rmb155 and reiterate the "BUY" rating.