The weak demand in the smartphone market and the continued downgrading of cameras have put pressure on the company's profitability. Under the influence of repeated epidemic, chip shortage, conflict between Russia and Ukraine and inflation, the company achieved 16.972 billion yuan in operating income in the first half of 2022, a decrease of about 14.4% compared with the same period last year. This is mainly due to: 1) weak demand in the smartphone market and the downgrading of smartphone cameras have led to a decline in shipments of mobile phone lenses and camera modules compared with the same period last year, and increased the pressure on the average sales price. 2) the growth rate of vehicle lens and module is not as fast as expected. In terms of profitability, the gross profit of the company in the first half of 2022 was about 3.522 billion yuan, down 28.8% from the same period last year; the gross profit was about 20.8%, down about 4.1 pct compared with the same period last year; and the net profit was about 1.36 billion yuan, down 51.9% from the same period last year.

The performance of the company's mobile phone lens and camera module is lower than expected, and the strengthening of R & D capability and customer stickiness will help consolidate the market leading position. In terms of mobile lens business, shipments in the first half of 2022 fell by about 9.1% compared with the same period last year to about 652 million units, and the market competition is still fierce; in terms of camera modules, shipments fell by about 20.1% to about 289 million pieces compared with the same period last year. At the same time, the company continues to strengthen its R & D and engineering capabilities, further enhance its stickiness with domestic customers, and actively expand the business of overseas customers. A number of high-specification mobile phone lenses and camera modules such as 200-megapixel ultra-thin lenses and internal focus camera modules have been developed, and large-scale camera lenses and OIS camera modules and other mobile phone lenses and camera modules have been mass produced. The number one position of market share in the world continues to be solid, and the performance is expected to return to the upgrading trend in the recovery phase of the smartphone market.

A number of tracks continue to make efforts, and the company's business is expected to see considerable growth in the medium to long term. In the first half of 2022, the company's car lens shipments slightly increased by about 0.8% compared with the same period last year to about 38 million units, with a solid global leading position, and the research and development and mass production of a number of products further enhanced the overall competitiveness. In terms of vehicle module, the company has completed the research and development of 8 megapixel A-PHY transmission technology vehicle module and 5 megapixel cockpit member monitoring ("OMS") vehicle module, and added new mass production projects and designated projects. In addition, the company is actively expanding a number of tracks: grasp the meta-universe tide, complete the research and development of AR optical machine projection lens, achieve mass production of the new generation of VR spatial positioning lens and VR pancake module, continue to develop robot vision business, complete the first generation of standardized product research and development, 3D vision modules and other products have achieved mass production. The company actively arranges a number of businesses, opens a new growth ceiling, and is expected to become an important engine driving performance increment in the medium and long term.

We forecast that the company's earnings per share for 22-24 are 3.05,3.72,4.44 respectively (the original forecast for 22-24 is 5.46,6.36,7.07, mainly reducing the forecast of mobile phone lens and camera module income and gross profit margin, and raising the rate of R & D and management expenses). According to the comparable company's 22-year average 41 times PE valuation, the target price is HK $146.09 (RMB / HK $1.16). Maintain the buy rating.

Risk hint

The global smartphone market demand continues to be weak; the epidemic repeatedly affects downstream demand; the vehicle business and AR/VR-related products are not as expected; and the research and development process is not as expected.