First coverage
Investment highlights
For the first time, Gaowei Electronics (01415) was given an outperforming industry rating, with a target price of HK$23.20, corresponding to a price-earnings ratio of 25.7/18.5 times 2023/24 based on the relative valuation method. The reasons are as follows:
Gaowei Electronics is gradually becoming one of Lixun Group's important strategic puzzles, joining hands with the Group to build optical track manufacturing capabilities. In 2020, Lijing Innovation (a subsidiary of Lixun Group) joined Gaowei Electronics through the acquisition of shares held by Mr. Guo Zhonghuan, and became Gaowei Electronics' main holding company. We believe that on the one hand, Lixun Group's entry brought excellent lean manufacturing experience to Gao Wei. The company's net profit CAGR reached 41% in 2020-2022, and growth continued to improve. On the other hand, with Gaowei's customer accumulation and production line capacity on mobile camera modules, Lixun Group effectively expanded its business layout in the fields of optics and lidar for major North American customers, which greatly enhanced Lixun Group's precision manufacturing capabilities in the optical industry.
Micro-innovation in mobile phones continues, and the number of ARVR devices is increasing to enhance the interactive experience. On the mobile phone business side, Gaowei Electronics began cooperating with major North American customers to reserve FC process production capacity in 2012. Based on forward-looking investment in production lines and support from Lixun's lean manufacturing capabilities, we estimate that the company achieved a significant increase in the share of mobile phone front-camera products for major customers in North America in 2022. Looking forward to the future, micro-innovations such as periscope rear cameras will continue to develop. We are optimistic that Gaowei Electronics will continue to gain product share from major customers through the scarcity of its FC production line and lean manufacturing capabilities; on the ARVR side, the industry trend where the number of cameras installed boosts the user interaction experience continues. We are optimistic that Gao Wei will actively enter new products from major customers in North America.
Lidar business: In line with the Group's strategy, the second growth curve is imminent. According to TSR, the global lidar market is expected to grow from 600 million yuan in 2021 to 9 billion yuan in 2025, and the industry can be expected to grow. In 2022, Gaowei Electronics and Suteng Juchuang established Dongguan Liten's innovative subsidiary to use intelligent automation capabilities to empower the production of semi-solid-state and solid-state lidar. We are optimistic that Gaowei Electronics will use lidar as a starting point to expand its automotive optics business. The second growth curve is imminent.
What's the biggest difference between us and the market? We are more confident that the company's share of mobile phone module products will increase.
Potential catalyst: The introduction of camera module products for major North American customers has exceeded expectations.
Profit forecasting and valuation
We expect the company's EPS to be $0.12 and $0.16 for 2023 and 2024, respectively, and a CAGR of 26.5%. Currently, Gaowei Electronics' stock price corresponds to 20.8/15.0 times the predicted price-earnings ratio for 2023/2024. Considering that Gaowei Electronics' customer base is solid and the expansion logic of mobile phones and automotive optical products is clear, we covered Gaowei Electronics' industry performance rating for the first time. The target price is HK$23.20, corresponding to 25.7/18.5 times the predicted price-earnings ratio for 2023/2024. There is still room for 23.4% upward from the current stock price.
risks
The customer structure was a single risk, and the upgrade of automotive optical products fell short of expectations.