Different from the market point of view: the current TWS headphone industry has a high degree of prosperity, we believe that the company's investment opportunities come from the future changes in the competitive pattern of the industry. We believe that the accelerated launch of the non-Airpods headset market, and as the product experience begins to enter the hard core phase, the "middle small" pattern is expected to improve, which will benefit the company's downstream mobile phone brands and top audio manufacturers. At the same time, we believe that the company has the advantages of customers, R & D and scale, and the industry high β and company strong α enter the resonance period, which will continue to benefit the evolution of the industry competition pattern.

The TWS headphone industry is booming, and the product experience begins to enter the hard core stage. From 2016 to 2018, global shipments of TWS headphones increased from 9.18 million to 46 million, with a compound annual growth rate of 124%. Total shipments of 77.5 million headphones in the first three quarters of 2019 have far exceeded that of 2018. The current prosperity of the TWS headphone industry is high. From the analysis of Bragi headphones and Airpods process, we know that TWS headphones will enter the hard core stage. 2017-2018 Bluetooth technology transmission program is not mature, the major manufacturers are focused on solving TWS headset Bluetooth disconnection, delay and other Bluetooth technology transmission problems, after solving the basic wireless Bluetooth transmission problems, the product will focus on the consumer product experience itself, noise reduction, sound quality and intelligence will become the product experience optimization of the three major directions of development, downstream mobile phone brands and top audio manufacturers have advantages in these three aspects.

Non-Airpods headphone market accelerated launch, "small in the middle" pattern is expected to improve, investment perspective needs to be switched. We divide the TWS headphone market into two markets: Airpods and non-Airpods headphones, looking at the future growth space. Let's assume that 98m iPhone phones are sold this year and 62 million Airpods phones are sold this year, with a penetration rate of 32 per cent. On the Android side, Android assumes that 1.192 billion phones will be sold this year, with only 55 million TWS headphones sold, with a penetration rate of just 5 per cent. Based on expected penetration and ex-factory prices, we expect sales of non-Airpods headphones to accelerate and the market size in 2023 is expected to grow eightfold compared to 2019, while the Airpods market is nearly two times larger by analogy. Further analysis, the overall market structure of TWS headphones shows the characteristics of "big at both ends and small in the middle", that is, high-end models sell the most in Airpods, followed by low-end models (the price is less than 200yuan), and finally non-Airpods middle and high-end models. Through the comparative analysis of the historical evolution of smart phones, combined with our judgment that TWS headphones have entered the hard core stage, we believe that shipments of high-end brands of non-Airpods headphones will increase significantly, and the "small in the middle" pattern will be improved, which will benefit mobile phone brand manufacturers and top audio manufacturers.

The company's three major advantages to build competitive advantages, the benefit is relatively clear. The company takes headphone manufacturing as its core business and mainly operates in ODM mode. 2019 half-year revenue of wireless headphones (542 million yuan) is close to 2018 annual revenue (594 million yuan), and wireless headphones have become the main contribution to headphone revenue. We believe that the company has the advantages of customers, R & D and scale, and will continue to benefit from the evolution of TWS headphones and competitive landscape. In terms of customers, the company began to promote the strategy of large customers and large orders in 2017, and the customer concentration has been increasing. Harman has always been the company's largest customer, accounting for 49.18% of 2019H1 revenue. In 2019, the company successfully cooperated with Huawei and Skullcandy, and 2019H1 Huawei and Skullcandy immediately became the company's top five customers. In terms of mobile phone brands, the company also passed Samsung certification in 2019. Harman for the top audio manufacturers, Huawei, Samsung for the global market share of the top three mobile phone brands, the company into its supply system, in line with the competitive pattern of the industry. In terms of R & D, the company has a deep accumulation of technology and continues to make efforts to wireless intelligence. Raising investment in R & D centers will also promote technological innovation and upgrade, and further enhance the potential for future development. In terms of scale, the company already has manufacturing and quality advantages, and the company raises investment in smart factory construction projects, which will help to improve production efficiency.

In terms of production capacity, the company's Vietnam plant is about to start production, boosting the company's production capacity. The company also uses outsourcing processing to increase production capacity and reduce production costs. We compare and analyze the revenue and profit of the main ODM and OEM enterprises of TWS headphones in the market, and we believe that the company has relative size and profit advantages.

Profit Forecast: we estimate that the company's revenue in 2019, 2020, and 2021 will be 2.237, 0.05, 3.911 billion yuan, respectively, and the net profit of its parent will be 2.92 billion yuan, corresponding to EPS 0.83 / 1.21, 1.75 yuan, and the current share price will be 63.89, 43.88, 30.27 times of PE. We believe that the current TWS headphone industry is booming, the non-Airpods headphone market is accelerating, and as the product experience begins to enter the hard core stage, the "middle small" pattern is expected to improve, which will benefit the company's downstream mobile phone brands and top audio manufacturers. At the same time, we believe that the company has the advantages of customers, R & D and scale. Harman continues to be the company's largest customer, and the company has entered the supply chain of Huawei and Samsung. Huawei has become the top five customers in the first half of the year and has high order flexibility in the future. in addition, the production capacity of the Vietnamese factory will also be released next year, and the company's future performance is highly uncertain. Therefore, we believe that the high β of the industry and the strong alpha of the company entering the resonance period will continue to benefit from the evolution of the competition pattern of the industry. For the first time, we give 55 times PE in 2020, combined with an EPS of 1.21 yuan in 2020, give the target price 66.55 yuan, reasonable valuation room for increase is 23.91%, and give a "highly recommended" rating.

Risk tips: the risk of TWS headphone sales falling short of expectations; the risk of order loss from the company's major customers; the risk that the company's capacity expansion is not as expected; the risk of large exchange rate fluctuations.