PNC Process Systems, established in 2000, started off its business with high-purity process systems and has gradually ventured into fields such as semiconductors, optoelectronics, and photovoltaics （PV）。 Currently, the Company has become a leading local supplier of wet process technologies capable of handling up to 14nm nodes in China. From 2018 to 2022, it achieved a revenue CAGR of about 46% and a net profit CAGR of about 72%. Its earnings have been growing rapidly in recent years. Considering that PNC is still in the growth stage and there is a significant gap between the growth rates of wet process equipment and high-purity process systems, we assign a target market cap of Rmb20.9bn, corresponding to a target price of Rmb54, and initiate coverage with a “BUY” rating.

Extending from high-purity technology to semiconductors, biopharmaceuticals, optoelectronics, and PV.

Established in 2000 with a focus on high-purity process systems, PNC has expanded its operations into semiconductor wet cleaning equipment, optical sensing applications, and related optical components through strategic M&As and the establishment of dedicated business units since 2017. Its versatile products find wide-ranging applications in semiconductors, microelectronics, biopharmaceuticals, photovoltaics, optical fibers, and light-emitting diode （LED） displays. In 2022, The Company achieved operating revenue of Rmb3.05bn with a net profit of Rmb282mn, up 46.32% YoY and 0.24% YoY, respectively. From 2018 to 2022, it recorded an impressive CAGR of c.46% in revenue and c.72% in net profit, showing rapid expansion in recent years.

The global cleaning equipment market is dominated by foreign vendors, but the localization rate in the domestic market is rapidly rising.

1） Cleaning equipment: According to Gartner, the market size of global semiconductor cleaning equipment was about US$4.7bn in 2022, with Japanese, Korean, and American manufacturers such as SCREEN Semiconductor Solutions, Tokyo Electron, SEMES, and Lam Research holding a combined, dominant market share of 97.7%. We estimate that the Chinese market was about Rmb9.95bn in 2022, with a localization rate of 26% over the past five years. 2） High-purity process systems: According to our estimates, the global expenditure on high-purity process systems for semiconductors in 2022 was about US$7.6bn, and the global market is currently dominated by companies such as Kinetics Process Systems, Morimatsu Industry, Marketech lnternational, United Integrated Services, etc. We calculate that the market for high-purity processes in the Chinese mainland was about Rmb7,303mn in 2020, with offshore suppliers taking the lion’s share. PNC is technologically advanced in high-purity process systems and has a strong competitive advantage among domestic peers.

Semi equipment: Scaling up to meet demand on the back of advanced technologies.

In 2022, PNC's revenue from the semiconductor equipment business was Rmb794mn, accounting for 26.04%. After 2019, semiconductor cleaning equipment has become the Company’s core product. PNC uses the　　international mainstream Nano Spray cleaning technology, combined with the high-efficiency sulfuric acid recovery process and the sulfuric peroxide mix （SPM） cleaning technology, which enhances its technology leadership and cost-effectiveness. The Company’s wet process equipment technology can be applied to advanced processes, such as storage （dynamic random-access memory, or DRAM, and 3D Flash）， advanced logic products, and some special processes. At present, PNC has obtained equipment orders for all processes at the 28nm node, and has already delivered orders of 4 sets of wet process equipment at 14nm and below. The Company's wet process equipment has been recognized and used by top-tier chipmakers, including SMIC, Hua Hong Semiconductor, ChangXin Memory Technologies （CXMT）， and CR Micro, all of which are market leaders in the downstream.

System integration and materials: Stable revenue growth.

In 2022, PNC's revenue from the system integration and materials business was Rmb2.251bn, accounting for 73.82%. In 2022, the Company adjusted its revenue reporting standard and stopped disclosing the revenue breakdown by segment. Back in 2021, the high-purity process system segment generated revenue of Rmb1.078bn （+24.91% YoY）， accounting for 51.73%. It is worth noting that ultra-high-purity dry and wet chemicals are essential media for completing the pan semiconductor manufacturing process. Based on data from Gartner, we estimate that the global market size of high-purity process systems is nearly US$10bn, mainly monopolized by manufacturers in the US, Japan, and Taiwan, China. After years of R&D, the Company has mastered a number of core technologies and built close ties with top-tier customer, becoming a leading enterprise in the domestic high-purity process system industry. Its major domestic customers include HLMC, SMIC, Yangtze Memory Technologies （YMTC）， CXMT, Silan Micro and many other leading chipmakers. As these downstream customers ramp up production over the next 2-3 years, we expect its high-purity process system business to receive a boost and achieve stable growth.

Future plans: Expanding capacity, product mix, and market share.

PNC is committed to building a high-end semiconductor equipment manufacturing and development platform. It plans to conduct research on advanced single chip wet process equipment for 14nm-and-below process nodes, while expanding its new product line of coating/developing equipment. In terms of production capacity, the Company proposed to build a production base in Yizhuang, Beijing, which is likely to double its capacity compared with 2021. In terms of business development, PNC plans to launch new products and initiatives, including bulk gas stations, component cleaning, gas cabinet products, component manufacturing, and wafer regeneration, aiming to grow into a full-process solution and service provider capable of providing high-purity process systems, semiconductor equipment, and bulk gas/chemicals. We believe PNC stands well to benefit from the visible trend of domestic wafer fab expansion and the growing popularity of domestic equipment. As the Company continues to expand its equipment categories and build a new growth curve, its earnings are likely to keep growing as well.

Potential risks:

Technology development falling short of expectations; the progress of customer verification falling short of expectations; industry development falling short of expectations; international tensions; talent losses; insufficient working capital of the Company; significant fluctuations in exchange rates.

Investment recommendation:

Considering the continuous launch of high-end products, the commissioning of new production facilities, and the scale effect of wet process equipment, we expect PNC’s profit margins to keep improving. In the meantime, the revenue from the high-purity process system may continue to expand, bolstered by robust demand from the semiconductor industry, while new initiatives such as wafer regeneration, component cleaning, and bulk gas stations are well-poised to deliver rapid revenue growth. We expect PNC’s 2023E/24E/25E operating revenue to be Rmb4,169mn/5,274mn/6,378mn, with the net profit forecast at Rmb514mn/673mn/875mn, corresponding to EPS forecast of Rmb1.33/1.74/2.27. Given the stable top-line and bottom-line growth of the high-purity process business, as well as the rapid growth in the semiconductor equipment business due to increased demand from downstream customers, and the different valuation rationale for these two segments, we adopt the sum-of-the-parts （SOTP） valuation method. For the semiconductor equipment business, we assign 12x 2023E PS, the same as the average Wind consensus estimates for comparable companies including ACM Research Shanghai （688082.SH） and Kingsemi （688037.SH）， to derive a target market value of Rmb17.4bn. For the system integration and materials business, we assign 14x 2023E PE, at a discount to the Wind consensus estimate of 29x 2023E PE for Shanghai Gentech （688596.SH）， to derive a market value of c.Rmb4.4bn. Additionally, based on the discounted cashflow （DCF） method, we calculate the reasonable equity value of the Company to be Rmb20.9bn, corresponding to a target price of Rmb54. Based on the results of the SOTP and DCF valuation methods, we pick the lower of the two out of caution and eventually arrive at a target market cap of Rmb20.9bn for PNC, corresponding to a target price of Rmb54. We initiate coverage with a “BUY” rating.