Incident: The company released its 2021 annual report. In 2021, the company achieved revenue of 1,303 billion yuan, an increase of 59.17% over the previous year; realized net profit of 47.4515 million yuan, an increase of 115.04% over the previous year; and realized net profit of 314.261 million yuan, an increase of 110.06% over the previous year. In the Q4 quarter of 2021, the company achieved revenue of 380 million yuan, an increase of 134.42% over the previous year, an increase of 6.74% over the previous month, and the net profit of the mother was 2,348 million yuan, an increase of 100.74% over the previous year, and a decrease of 92.00% from the previous month.

Revenue reached a record high in '21, and profitability increased dramatically: in 2021, the company's Micro LED display revenue based on COB technology was 408 million yuan, an increase of 86.81% over the previous year. Among them, domestic COB display revenue was 388 million yuan, up 93.64% year on year; international COB display revenue increased 48.96% year on year, and the company's micro LED ultra-high definition display market share continued to increase, which became an important driving force for the company's performance growth. In terms of gross margin, the company's gross margin in '21 was 23.90%. The 2.42pct increase over the previous year was mainly due to factors such as scale effects brought about by high performance growth, process optimization and technology upgrades, and continuous cost reduction and efficiency. In terms of R&D, the company's R&D expenses were 63 million yuan, an increase of 8.06% over the previous year, mainly due to the company's continued exploration and development of cutting-edge COB technology and its applications. In terms of production capacity, the company expanded COB production line on a large scale in '21, and the capacity utilization rate remained high.

The plan is to increase COB production at an accelerated pace to help the company's long-term development: the company plans to raise 689 million yuan in capital, mainly for COB UHD display renovation and expansion projects and supplementary working capital. The total investment of the project was 540 million yuan, and the construction period was 24 months. The project was put into operation starting in T1. Production is expected to reach 12% in that year, and full production by T5. After delivery, it is estimated that annual revenue of about 1,147 billion yuan will be achieved after delivery. The internal rate of return on project investment after tax is 16.07%. The company raised capital to expand the production capacity of COB display products through fixed increases, which will increase the proportion of COB high-margin products, and the product structure will be further optimized. Furthermore, as the production capacity of the company's COB display products increases, economies of scale and supply capacity will be further improved, and its share in the small-pitch LED market is expected to increase further, continuing to consolidate its leading position in the LED industry.

Small pitch LED displays have entered a period of rapid growth, and COB display market share is expected to continue to increase: Currently, small-pitch LED display products are in a period of rapid development, which is expected to continue to drive the growth of the LED display market size. According to Aowei Cloud Network data, from 2019 to 2021, the domestic small-pitch LED display market size was 10.37 billion yuan/118 billion yuan/18.15 billion yuan respectively, with year-on-year growth rates of 55.2%/13.79%/53.90% respectively. According to Aowei Cloud Network data, revenue from small-pitch products with a point spacing of 2.5mm-2.1mm decreased 4.9% year-on-year in 2019, while small-spacing products with a point spacing of 1.4mm-1.2mm increased 64.2% year-on-year. In the micro pitch display market below P1.0, COB is one of the core technology routes. The display effect and cost advantages are gradually showing, and its share in the small-pitch LED display market is also gradually increasing. The company's leading COB technology is expected to continue to benefit from the expansion of the small-pitch display market.

Maintaining the “buy” rating: We are optimistic that the company's COB technology will continue to lead. As the penetration rate of the ultra-small spacing market accelerates in the future, COB packaging below P1.0 is expected to become the mainstream development direction in the future, and the company has a clear first-mover advantage. The company's net profit for 2022-2024 is estimated to be 0.69/101/136 million yuan, and EPS is 0.20/0.29/0.39 yuan, corresponding to PE 37X, 25X, and 19X respectively.

Risk warning: Market demand fell short of expectations, the penetration rate of small-pitch LED displays fell short of expectations, production capacity fell short of expectations, and the company's product promotion progress fell short of expectations.