Incident: The company released its 2022 report, achieving operating income of 7.08 billion yuan, a year-on-year decrease of 2%; Guimu's net profit of 64 million, a year-on-year decrease of 65%; net profit after deduction of 503 million yuan, a year-on-year decrease of 53%; net cash flow from operating activities was 700 million yuan, an increase of 690 million over the previous year. The decline in net profit was mainly due to the company's accrued impairment losses totaling 394 million yuan. At the same time, the company released the first quarter report of 2023, achieving revenue of 1.63 billion yuan, an increase of 5% over the previous year; the net profit of the mother was 145 million, an increase of 86% over the previous year; and the net profit of the mother after deduction was 137 million, an increase of 121% over the previous year. The performance exceeded expectations.

2022 showed steady business performance. Impairment losses dragged down performance of LED display revenue of 6.42 billion yuan in 2022, an increase of 4% over the previous year, and an increase of 5 percentage points to 91%. The gross profit margin was 27.53%, an increase of 4.24 percentage points over the previous year. Growth was driven by overseas markets, with revenue up 43% and gross margin was high (34.27%); the domestic market declined more.

In 2022, the smart lighting and cultural and creative lighting businesses were affected by the general environment, falling 10% and 81% respectively, causing the company to calculate depreciation. In 2022, total depreciation was 394 million, including 123 million for goodwill, 122 million for inventory price drops, and 126 million for bad debts. Inventory, accounts receivable, and goodwill at the end of the first quarter were $1.75 billion, $1.64 billion, and $137 million, respectively, improving.

It is highly competitive in the XR virtual shooting field, strengthening technological innovation and integration of naked eye 3D, digital people, etc. With its brand influence in the international high-end display field, Radio occupied “half of the mountain” of virtual shooting. In 2022, Radio earned 1.66 billion dollars, an increase of 22% over the previous year. It is expected that it will continue to benefit from the high growth of the XR virtual shooting market in the future. At the same time, the company is also strengthening innovation and integration of naked-eye 3D content creativity, digital virtual people, AI and other technologies.

Earnings improved sharply in the first quarter, and recovery is still on the way

Net profit in the first quarter increased 86% year on year, mainly due to: 1) a significant improvement in gross margin. The 23Q1 gross profit margin was 32.1%, an increase of 7.5/6.9 percentage points over the previous year/month respectively. The main reason was the rapid growth of overseas business with high gross margins; 2) net investment income of 46.09 million yuan, an increase of 39.11 million yuan over the previous year, and an increase in investment income from associated enterprises.

Profit Forecasts, Valuations, and Ratings

We expect the company's revenue for 2023-25 to be 8.5 billion, 10.5 billion, and 13 billion yuan respectively (the original forecast for 2023-24 revenue would be 8.1 billion and 10 billion yuan), with growth rates of 20%, 24% and 24% respectively; net profit of 650 million, 780 million, and 930 million yuan respectively; growth rates of 920%, 20% and 19% respectively; EPS was 0.59 yuan, 0.71 yuan, and 85 yuan respectively. Given the company's leading position in the small-spacing industry, referring to comparable company valuations, we gave the company 20 times PE for 23 years, with a target price of 11.80 yuan, maintaining the “buy” rating.

Risk warning: The recovery of the domestic economy fell short of expectations; the recovery of the company's domestic business fell short of expectations;