The company released a report for the third quarter of 2020, with revenue from + 13.52% to 37.894 billion yuan and net profit from + 309.21% to 739 million yuan, which is at the median level of the previous forecast. Looking ahead, the company has strategically spun off the loss touch business and focused on the main optical business, and it is expected that the performance will continue to pick up. We maintain the company's EPS forecast of 0.57 EPS 0.77 max 0.94 yuan in 2020-2022 and maintain the "buy" rating.

Focusing Optics main track, 2020Q3 achieved a net profit of 237 million yuan, in line with expectations. Excluding the impact of Android touch business, the company's revenue in the first three quarters of 2020 was + 13.52% to 37.894 billion yuan, and net profit was + 309.21% to 739 million yuan. On a quarterly basis, Q1/Q2/Q3 revenue was 13.6 billion yuan, 6%, 5%, respectively, and net profit was 1.4 million yuan, 362.4 million yuan, and + 155%, respectively. The continued improvement in the company's profitability is mainly due to (1) strengthening cost and inventory management while promoting the resumption of work and production after the epidemic has been controlled; (2) divesting the touch business and focusing on the main optical business. The retained touch business benefits key customer product sales growth and business structure optimization, while increased shipments of high-end optical modules and lenses also contribute to increment. Looking to the future, the company focuses on optics, horizontally extends 3Dsensing, vehicle and other businesses, and vertically expands upstream lens products. In the future, it will be based on the optical track to create a microelectronic innovation platform.

The gross profit margin increased to 10.65% from the same period last year, the operating efficiency was improved due to improved management, and the debt structure continued to be optimized. In the first three quarters of 2020, the company's overall gross profit margin increased from + 0.84pct to 10.65% compared with the same period last year, mainly because the company spun off its touch display business, focused on the main optical track, and optimized its product structure. On the expense side, the company's three-fee expense rate in the first three quarters is year-on-year-0.82pct to 3.92%, and the sales / management / financial expense rate is respectively year-on-year-0.10/+0.42/-1.14pcts. The significant reduction in financial expense rate is mainly due to the reduction of interest expenses and the impact of foreign exchange. In addition, the company's management continued to improve and operating efficiency improved. By the end of the third quarter of 2020, the inventory was 6.3 billion yuan, which was about 1 billion yuan lower than the middle of the year. The inventory turnover days were 16 to 55 days lower than the same period last year. The debt structure also continued to be optimized. Compared with the end of 2020, the short-term debt decreased by 2.1 billion yuan to 4.9 billion yuan, while the long-term debt increased by 3.3 billion yuan to 5.5 billion yuan. The overall asset-liability ratio in the first three quarters of 2020 was year-on-year-2.6pcts to 70.33%, and the current ratio, which measures short-term solvency, rose 0.21 to 1.14, and the quick ratio rose 0.31 to 0.82 year-on-year.

Optical main industry: camera module helps growth, epitaxial layout 3Dsensing, fingerprint identification, intelligent vehicle. (1) camera business: in the first three quarters of 2020, camera module shipments ranged from + 21.81% to 553 million, and Q3 shipped 261 million, accounting for 47% of the first three quarters. Looking forward to 2020, the penetration rate of + 20pcts and above on mobile phones is expected to reach about 40% compared with the same period last year, while the unit price is several times higher than that of dual cameras. The company is one of the few domestic manufacturers with high-end multi-camera production capacity, and we expect the capacity to continue to increase in the future. (2) 3D sensing:2020 shipments in the first three quarters of this year ranged from + 38.96% to 79 million pieces, and Q3 shipped 35 million pieces, accounting for 44%. The company has the production capacity of 3D structured light and ToF modules, and is the main domestic supplier of 3D sensing modules. (3) fingerprint identification business: 2020H1 shipments range from-9% to 116 million pieces year-on-year, mainly due to the shrinkage of the traditional capacitor fingerprint market and the off-screen fingerprint penetration is not as expected. (4) on-board business: the company's business includes ADAS and on-board cameras. at present, it has obtained the supplier qualification of more than 20 domestic automobile manufacturers, and the acquisition of Fuji Tianjin also further strengthens the company's layout in terms of on-board lenses, and the proportion of revenue from automobile business is expected to increase gradually in the future.

Industrial layout: deep ploughing optical track, vertical expansion of upstream lens business. In the first three quarters of 2020, lens shipments were + 29.28% year-on-year to 132 million, and Q3 shipped 41 million, accounting for 31%. We estimate that the current lens production capacity of the company exceeds 30kk/ months, and is expected to reach 40-50kk/ months by the end of 2020 and further increase to more than 60-70kk/ months in 2021.

Risk factors: industry demand is lower than expected, core client income is lower than expected, increased competition leads to a decline in gross profit margin, and the consumer electronics industry continues to decline.

Investment suggestion: the company is the leader of domestic consumer electronics optical module, stripping the loss-making touch business to further focus on the main optical industry. Optical innovations such as multi-photography, 3D sensing and off-screen fingerprints continue, and the company's performance is expected to pick up. We maintain the company's 2020-2022 EPS forecast of 0.57 PE 0.77 + 0.94 yuan, taking into account the company's divestiture of the loss-making business, focusing on the main optical business, vertical layout of lenses + modules, horizontal expansion of vehicle, 3D and other businesses, open long-term growth space, give 2021 30 times PE, corresponding to the target price of 23.17 yuan, maintain the "buy" rating.