Core views:

OJing Science & Technology is mainly engaged in quartz crucibles and is actively extending its presence to silicon material cleaning and cutting fluid treatment services. Its crucible business has certain economic moats due to the scarcity of high-quality quartz sand and production technology. We expect that there will be limited increase in the supply of high-quality quartz crucibles in 2023 and that the gap between supply and demand may further widen, offering further room for price increases. At the same time, the Company enjoys stable access to quartz sand and boasts a leading edge in high-quality large-size crucible production, which will likely add premium to its products. We forecast the 2022E/23E/24E EPS to be Rmb1.81/4.84/8.24.

Abstract:

A leading quartz crucible manufacturer with rapid growth.

OJing Science & Technology was built as a supporting company to the business of TCL Zhonghuan in Inner Mongolia in 2011. Its business includes quartz crucible products, silicon material cleaning and cutting fluid treatment services, which are widely used in the photovoltaic (PV) and semiconductor industries. Relying on its own R&D strength and years of technology accumulation, the Company has gradually established an important position in the standard setting of major products in the crucible field. In the past three years, the operating revenue from TCL Zhonghuan has remained stable at around 90%. Meanwhile, OJing has also actively developed new clients in PV and semiconductor monocrystalline silicon areas. Since its establishment, the Company has achieved a 27.97%/26.05% CAGR in revenue/attributable net profit (ANP), respectively.

The supply-demand gap of crucibles may further enlarge in 2023.

On the demand side, we expect demand for quartz crucibles to reach 0.78mn/1.18mn/1.51mn units in 2022/23/24, based on the growth of downstream installed capacity, the trend of large-size wafer and development of N-type cells. On the supply side, the consistent quality of quartz crucibles is required during the production process due to the high purity requirement of monocrystalline wafers and high cost of single-crystal pulling. The quality consistency is backed by the combination of high-quality quartz sand and production technology, which forms a certain threshold for players in the industry. Given the supply of high-purity quartz sand at home and abroad, there may be 0.63mn/0.96mn/1.37mn crucibles produced in 2022/23/24. Therefore, we expect the supply-demand gap to be further enlarged in 2023, fueling more room for the price rise of the PV quartz crucibles, and the supply-demand gap is likely to widen gradually QoQ from 4Q22 to 2023.

Rising volume and ASP amid stable supply.

In order to ensure the stability of upstream core suppliers, OJing signed a five-year strategic cooperation agreement with Beijing Geo-Lite and Pacific Quartz. By gradually replacing imported quartz sand with domestic quartz sand, the Company’s high-purity quartz sand procurement cost dropped from Rmb31.22/kg in 2019 to Rmb23.87/kg in 2021, a cumulative decrease of 23.54%, against the average increase of 20%-30% in domestic and international PV high-purity quartz sand during this period. In addition, the Company has actively made process improvements and technical upgrades to the crucible structure, raw material utilization and manufacturing methods, and has developed large-size crucibles with longer life and higher crystal pulling efficiency. The average selling price (ASP) of quartz crucibles above 28 inches is more than 100% higher compared to that of 28 inches and below. Benefiting from the continued increase in the proportion of large-size crucibles, the Company’s product ASP in 2021 has increased significantly by 60% YoY. As a result, the gross profit margin (GPM) of the Company’s quartz crucible business has continued to rise since 2019, and its earnings level will likely rise further in the future as quartz crucible supply continues to be tight. In addition, high-quality quartz crucible will likely become the key differentiator of downstream non-silicon cost in 2023, which has a great impact on the secondary cost and product quality of silicon wafer enterprises. OJing has certain cutting edge in large-size quartz crucible production, which may bring in certain product premiums.

Industry chain extension: Benefiting from downstream demand with growing business size.

In recent years, the Company’s sales of recycled monocrystalline silicon have continued to grow, from 50kt in 2019 to 133.4kt in 2021, a cumulative increase of 166%, mainly thanks to the expansion of silicon wafer production by downstream customers. In terms of price, due to the overall demand for cost reduction in the PV industry and the continuous sales volume growth, the selling prices of recycled monocrystalline silicon materials and primary polysilicon materials have both declined. For cutting fluid treatment business, the sales volume increased from 460.5kt in 2019 to 1,281.3kt in 2021, a cumulative increase of 178%. Combined with the continuous decline in unit costs, the GPM of this business bottomed out in 2019 and rose to 30.07% in 2021, the highest level in history.

Potential risks: Fluctuations in raw material prices; lower sales prices in the service business; less-than-expected PV demand; faster-than-expected product iteration and technology updates; net operating cash flow lower than net profit; high customer concentration.

Investment recommendation: OJing enjoys a sufficient supply of high-purity quartz sand and has actively developed large-size crucible products, making it well-poised to gain visible growth in both volume and ASP. In addition, the extended business along the value chain will also likely grow rapidly. We put our 2022E/23E/24E EPS forecast at Rmb1.81/4.84/8.24 for the Company.