On the evening of August 27th, San'an Optoelectronics (600703) announced its semi-annual report for 2024. In the first half of the year, the company achieved a total operating revenue of 7.679 billion yuan, a year-on-year increase of 18.70%; it realized a net profit attributable to the shareholders of the listed company of 184 million yuan, a year-on-year increase of 8.44%; the net value of inventory at the end of the period decreased by 122 million yuan compared to the beginning of the period, of which the net value of LED inventory decreased by 178 million yuan, and the net value of integrated circuit inventory increased by 56 million yuan. The inventory level has decreased, and the inventory structure continues to improve.

The announcement shows that during the reporting period, San'an Optoelectronics continued to carry out its business around the core main business of compound semiconductors, relying on production and manufacturing bases in multiple regions such as Xiamen, Tianjin, and Wuhu, as well as R&D centers and sales outlets in various countries, to continuously strengthen in-depth cooperation with high-quality enterprises at home and abroad. With its comprehensive solution capabilities, the company has been continuously enhancing its position in the global value chain and is striving towards the strategic goal of becoming a world-class semiconductor leader.

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Two major business lines are accelerating progress.

As a leading company in the semiconductor industry, San'an Optoelectronics' main business is mainly divided into two parts: one is the LED business, including LED chips and LED application products; the other is the integrated circuit business, mainly compound-related products, including gallium arsenide, gallium nitride products, RF, filters, and silicon carbide products, etc.

In terms of the LED business, during the reporting period, the company's LED epitaxial chip main business revenue achieved a year-on-year increase of 13.61%, of which traditional LED epitaxial chip products increased by 14.60% year-on-year, and high-end LED epitaxial chip products increased by 10.48% year-on-year. The economic recovery has begun to drive a steady increase in traditional LED demand. At the same time, the company's product structure adjustment in the LED business is also continuing to advance, with the gross margin increasing by nearly 5 percentage points year-on-year in this period.

Among them, the automotive LED technology capability is catching up with the first-tier international level, obtaining stable orders from top international and domestic car companies, and the development momentum is good. In the first half of 2024, 10 projects were finalized, Mini-LED reached mass production on Chang'an models, HD-LED pixelized module development was completed and entered the final test, projects with Dongfeng Nissan and Chang'an Automobile were developed, and batch supply was realized for brands and models such as Chery Zhiji, Dongfeng Yipai, and GAC Aion AY5; the subsidiary WIPAC obtained a new project from Bentley and continued to maintain business cooperation with several luxury car manufacturers such as Lamborghini, Rolls-Royce, Aston Martin, and Ferrari.

Moreover, LED lighting is about to usher in a second peak of replacement demand. Trend Force data shows that in 2024, 5.8 billion LED light sources and lighting fixtures will reach the end of their service life and retire globally, an increase of nearly 50% compared to 2023, accounting for more than 43% of the overall LED lighting demand in 2024, which will quickly change the sluggish state of the LED lighting market. The proportion of secondary replacement demand is increasing year by year, and will provide strong development momentum for the LED lighting market in the next few years.

In terms of the integrated circuit business, during the reporting period, the company's revenue in this business increased by 16.85% year-on-year. Benefiting from the recovery of terminal market demand and customer supply chain switching, the business revenue of gallium arsenide RF foundry and filter business increased significantly compared to the same period last year; silicon carbide focuses on automotive-grade applications, accelerates the technological iteration of silicon carbide MOSFET, promotes product performance upgrades, and quickly expands production capacity and actively deploys in the international market; the photonics technology segment focuses on core growth engines such as data communication, optical sensing, and lidar, continuously iterates products and promotes them to the market, and the business revenue also achieved steady growth.

In the first half of 2024, artificial intelligence and consumer electronics drove the recovery of downstream demand, and the global semiconductor market is continuing to recover, which will bring good development opportunities. The World Semiconductor Trade Statistics Association (WSTS) estimates that the global semiconductor annual sales will grow by 16.0% to $611.2 billion in 2024 and will continue to grow by 12.5% in 2025.

The inventory scale is 5.2 billion yuan, and the pressure is still relatively large.In recent years, San'an Optoelectronics has significantly improved its production efficiency by investing in advanced production equipment and optimizing its manufacturing processes, leading to a substantial increase in both production capacity and output. Despite certain progress in inventory reduction measures, the company's inventory levels remain relatively high. As of the end of June 2024, the company's inventory book balance stood at 5.188 billion yuan.

It is noteworthy that the company has several significant projects under construction. Among them, the joint venture between Hunan San'an and Li Auto, Suzhou Sko Semiconductor, has achieved the first phase of production line commissioning, with the full-bridge power module C samples already delivered. It is expected to complete product validation in the second half of this year, with the potential for mass production of modules in 2025.

The joint venture between Hunan San'an and STMicroelectronics in Chongqing, Anyifa, which produces silicon carbide epitaxy and chips exclusively for STMicroelectronics, will see its production equipment being installed and commissioned in the third quarter. It is anticipated to achieve production line commissioning in November, after which it will gradually ramp up production capacity. As of the report's end, Hubei San'an possesses a chip production capacity of 125,000 wafers per month. It is projected that the planned production capacity of this joint venture will reach full production by 2028, with a capacity of 480,000 wafers per year upon completion.

Hubei San'an primarily engages in the business of Mini/Micro LED epitaxy wafers and chips, as well as chip deep processing, with a total investment of 12 billion yuan. Once the project reaches full production, it will add approximately 2.36 million wafers per year of chip production capacity (equivalent to 4-inch wafers) and 84,000 units per year of packaging products for 4K display screens.

As various projects gradually reach full production, the company's production capacity will further expand. San'an Optoelectronics believes that the market penetration rate of the LED industry continues to increase, and there is still significant room for technological and market growth in the medium to long term. With the recovery of market sales, the gradual elimination of backward production capacity in the industry, and further development of downstream markets, the company's inventory digestion speed is expected to improve. The integrated circuit business is an industry that is vigorously developed domestically, with a strong demand for domestic substitution and rapidly growing downstream demand. The company is actively expanding its customer base and promoting applications. With the enhancement of customer trust and delivery capabilities, the company's product sales space will become broader.