The company's 2022H1 realized revenue of 16.972 billion yuan (year-on-year-14.4%) and net profit of 1.358 billion yuan (year-on-year). In the short term, the inventory of mobile phone terminals is still high, and the demand for spare parts is relatively weak. It is expected that the increase in the share of overseas clients will bring marginal increments, but changes in the industry pattern may lead to ASP fluctuations in some products, which we will continue to track. In the medium and long term, the company's business has expanded from mobile phones to cars and ARVR, and we are still optimistic about the company's strategic layout and market positioning. Taking into account the periodic pressure on the optical demand for mobile phones, we downgrade the company's EPS forecast for 2022-23-24 to HK $3.53 (the previous value is HK $4.76), with reference to the company's PE-Band hub over the past five years, maintaining a target PE of 35 times for 2022 and maintaining a "buy" rating corresponding to the target price of HK $123 (originally HK $167m).

Due to the weak demand for smartphones, the downgrade of mobile phone optics, and the pressure on superimposed cars due to disturbance in the supply chain, the company's revenue and net profit in the first half of 2022 were-14.4% and 49.5% respectively compared with the same period last year. In the first half of 2022, the company achieved revenue of 16.972 billion yuan (year-on-year-14.4%) and net profit of 1.358 billion yuan (- 49.5%). The relative pressure was mainly due to the weak demand in the smartphone market (especially at the Android end) and the downgrade of smartphone camera. superimposed car lenses and modules are under pressure due to lack of core shipments in the supply chain. In terms of profitability, the company achieved a gross profit margin of 20.75% (year-4.19pcts) and a net profit margin of 8.12% (year-5.53pcts) in the first half of the year. The gross profit margin of optical parts / optoelectronic products / optical instruments, etc., is 35.5%, 11.6%, 44.6%, respectively, compared with the same period last year-7.4/-3.2/+0.4pct. The company said at the interim results briefing that it expects a gross profit margin of 30% for mobile cameras, about 35% for mobile cameras, 40% for car cameras and 10% for mobile camera modules. In terms of expense rate, in the first half of the year, the company's sales and distribution expenses / R & D expenses / administrative expenses accounted for 1% of operating income, respectively, 8.7% and 2.6% of operating income, respectively, compared with the same period last year and + 0.2/+2/+0.7pct, respectively. The company said in the interim results briefing that it is expected that the three expense rates will add up to about 12% in 2022. Capex, the company said in the interim results briefing that the Capex guidelines for 2022 will be 3 billion yuan, of which 1 billion yuan will be used for emerging strategic businesses such as AR/VR, car cameras and lidar; 300 million yuan for production expansion of car lenses; 700 million yuan for production expansion and technical transformation of mobile phone lenses; 500 million yuan for technical transformation of mobile phone module production line; and 500 million yuan for infrastructure construction of the new base.

The company has lowered its guidelines on the growth rate of shipments of major products, and the growth rate of mobile phone lenses and modules is expected to turn negative for the whole year, and vehicle products are still expected to maintain 10% growth of 15% for the whole year. In terms of revenue, in the first half of 2022, the company's operating income of optical parts, optoelectronic products and optical instruments reached 440 million yuan, 12.37 billion yuan, respectively, compared with the same period last year. The revenue and pressure of optoelectronic products business is mainly due to the weak demand for smart phones and the reduction of mobile phone optical regulations. Under this background, the growth of optical parts is mainly due to the gradual increase in the demand for infrared lenses and the gradual mass production of vehicle lidar and HUD, and the revenue growth of optical instruments is mainly due to the increase in the demand for optical instruments used in the domestic industrial and medical fields. In terms of products, the revenue of mobile phones, cars, AR/VR, digital cameras and optical instruments was 127.6%, 17.2%, 6.6 and 40 million yuan respectively, compared with the same period last year. 19.5%, 10.5%, 14.2%, 29.9%, respectively, accounted for 75.2%, 10.2%, 3.2%, 2.4%, 0.9%. Respectively year-on-year-4.7/+2.1/+0.9/+0/+0.3pct. In terms of shipments, in the first half of 2022, 652 million mobile phone lenses were shipped (year-on-year-9.1%), of which 196 million mobile phone lenses with 6p and above were shipped (+ 20.0% compared with the same period last year). The shipping structure is optimized against the trend. The company expects mobile phone lens shipments to decline by about 15% in 2022 compared with the same period last year. Car lens shipments of 37.611 million (year-on-year + 0.8%), continue to maintain the leading position in the world. With the gradual improvement of supply chain disturbances, the company expects vehicle lens shipments to increase by 10% 15% year-on-year. Mobile camera modules shipped 289 million units (year-on-year-20.1%), of which 39.709 million pieces were shipped by periscope + elephant face modules (year-on-year + 56.2%). The company expects mobile camera shipments to decline by about 20% year-on-year.

Looking forward to the future, the company will still seize the opportunity of smartphone differentiation competition, actively layout vehicle optics, AR/VR and so on, to create a sustainable growth pole. (1) in terms of smartphones, the company is optimistic about the long-term trend of upgrading optical specifications of smartphones. In terms of lenses, during the reporting period, the company completed research and development of 200-megapixel ultra-thin lenses, front wide-angle small head lenses, and mass production of 200-megapixel super-large image surface lenses and double free-form lens ultra-wide-angle lenses. Looking forward to the follow-up, in the short term, the mobile phone terminal is still in the de-inventory stage, and the impact on the demand for spare parts remains to be tracked and observed, but as the mobile phone terminal goes to inventory and brand customers release new phones in the second half of the year, the company's lens shipments may be low before and high after. In the medium to long term, the number of mobile cameras is expected to remain stable, but the upgrade of optical specifications will drive the demand for high-end lenses; on the other hand, changes in the lens industry may lead to fluctuations in the ASP of some products, which we will continue to track. In terms of modules, during the reporting period, the company completed the research and development of focus camera module and adjustable aperture OIS camera module, and realized mass production of super-large image plane (1max 1.12 ") OIS camera module. In the short term, Android mobile terminals are still in the de-inventory stage, and the demand for the company's modules still needs further observation. In the long run, the company's downstream Android customers are fully covered, and gradually expand production for South Korean customers. With the construction of factories in Vietnam and India, the company is expected to become the head supplier of Korean customer modules, and the company is active in high-end modules such as potential, 3D, etc., it is expected to improve the module ASP and optimize the product structure.

(2) in terms of vehicle optics, the company further defines the strategic position of vehicle optical related products, lidar products focus on transmitting and receiving modules, transceiver modules, as well as the design and processing of core optical components and components, Touxian products will further accelerate the diversified product layout of AR-HUD and maximize to meet customer needs. In terms of lens, during the reporting period, the company completed the research and development of a number of 5-megapixel glass-plastic hybrid cabin monitoring lenses, and 3 million-pixel glass-plastic mixed side-view ADAS lenses to achieve mass production. In terms of modules, during the reporting period, the company completed the research and development of 8 million-pixel A-PHY transmission technology module and 5-megapixel passenger detection module, mass production of 8-megapixel environment-sensing module, and three fixed-point projects of 8-megapixel environment-sensing module. In the long run, the volume and price of car lenses driven by the new forces of car building have risen significantly. The company has been ploughing deeply in the automotive field for more than 20 years, with a leading share in the field of car lenses, supplying traditional car companies such as BBA, as well as new forces such as ideal and XPeng Inc.. In addition, the company continues to upgrade car products, 8 million pixels car camera module has been completed research and development, will continue to benefit from the autopilot acceleration infiltration car camera specification upgrading trend. (3) in terms of AR/VR, the company mainly distributes display, perception and interaction. During the reporting period, the company completed the research and development of AR optical-mechanical projection lens, and the new generation of VR spatial positioning lens and VR pancake module were mass-produced. We believe that the company's active layout of car optics, VR optics and other products is expected to make up for the shipment pressure caused by the weak demand for smartphones and create a sustainable growth pole.

Risk factors: continuous shortage of supply chain; repeated overseas epidemics; slow penetration of multi-photo / 3D Sensing/ latent vision; less than expected intelligent driving; downward gross profit margin of company modules; pressure on sales of major customers; increased competition in the industry.

Investment suggestion: the company is the optical leader of Chinese mainland. Under the trend of accelerated penetration of medium-and long-term auto-driving, the in-car business is expected to drive the company's revenue growth, and the long-term growth logic of 3D/ and other businesses is clear. Taking into account the periodic pressure on the optical demand for mobile phones, we downgrade the company's EPS forecast for 2022-23-24 to HK $3.53 (the previous value is HK $4.76), and with reference to the company's PE-Band hub over the past five years, we have given the 2022 target PE 35 times, corresponding to the target price of HK $123 (originally HK $167,000), maintaining a "buy" rating.