Deeply involved in the video field, the video+AI dual engine drives growth, and 2023 will usher in a reversal of the difficult situation:

Since its establishment in 2010, the company has focused on algorithm research for intelligent video technology. In particular, it has formed a core barrier in the direction of video coding and compression and AI analysis and recognition. It mainly targets media culture and pan-security customers, provides intelligent video solutions and video cloud services, while actively expanding new applications for in-vehicle intelligent entertainment cockpits.

In 2022, the pan-security industry was affected by the epidemic. Some projects were cancelled or delayed, and the supply of the company's newly launched 5G edge computing products was blocked, leading to a sharp decline in the pan-security sector. In 2023, with the gradual resumption of offline performances and competitions, and the implementation and promotion of early Pan-Safety R&D results, the company's operations will face a difficult reversal.

Digital China's top-level design and AI technology transformation resonate together, and the UHD video industry is starting again:

The rapid construction of 5G infrastructure has provided the soil for the UHD video industry; relevant policies continue to be introduced and are committed to developing the UHD industry chain ecosystem. 2023 is expected to benefit from the implementation of “One Hundred Cities, One Thousand Screens” in various cities. The “Overall Layout Plan for the Construction of a Digital China” elevates the development of the digital economy into a national strategy, the “Plan”

It is proposed to build a “national data resource base” where public data will be aggregated into state-owned data assets, which will tap the value potential of ultra-high-definition video data from enterprises, governments, and individuals, and place higher requirements on video transmission and storage; GPT-4, a large multi-modal AI model, is expected to span multi-modal model training and AI production in the future. Driven by top-level design and technological changes in digital China, superimposed data elements are flowing and implemented, and demand for massive ultra-high-definition video generation, transmission, transaction, and storage will expand nonlinearly. This places higher demands on video coding and compression, and companies with core coding and decoding technology will benefit significantly.

Relying on the accumulation of core technology, it opens up a new growth path: (1) Media culture: Occupies the high ground of codec technology and controls the key aspects of UHD video transmission. Video coding and transcoding uses the CPU+GPU+FPGA architecture to build technical barriers to meet the wave of localization; deeply participated in the construction of the “8K UHD TV IP Integrated Distribution Platform” at the headquarters, formulated technical standards related to “One Hundred Cities, One Thousand Screens”, and supported the broadcast of the 2022 Beijing Winter Olympics and the CCTV Spring Festival Gala. The implementation of “One Hundred Cities, One Thousand Screens” will be accelerated in 2023. (2) Pan-security: Edge computing is being implemented and promoted, and “one network management” urban governance is being deployed at an accelerated pace. The company provides complete solutions for “edge+central end+industry applications” for smart cities, smart social governance, government “one network management”, and financial, energy, rail transit, etc. Combining data from IDC and iResearch, it is estimated that by 2025, the domestic edge computing market will account for less than 3% of the global market. It is still in its infancy and has huge potential for development. (3) Smart cockpit: explore new scenarios for in-vehicle entertainment. Larger and multi-screen in-vehicle displays have provided fertile ground for the development of in-vehicle multi-screen interlocking systems and ambient synchronization systems. The company has now completed the designation of many car companies through direct contracts or cooperation with OEMs.

Investment advice: As a leading UHD video company, the company is deeply involved in video codec and AI analysis, and 2023 will usher in a reversal of the difficult situation. Driven by top-level design and technological changes in digital China, demand for massive ultra-high-definition video generation, transmission, transaction, and storage will expand nonlinearly, and the company's codec and edge computing products will benefit the core. We predict that the company will achieve revenue of 330, 555, and 774 million yuan in 2022-2024, and achieve net profit of -0.99, 41, 108 million yuan. Corresponding to PE in 2023 and 2024 will be 138x and 52x respectively, excluding the impact of equity incentive expenses, PE will be 67x and 41x respectively, maintaining the “increase in holdings” rating.

Risk warning: Risk of new business implementation falling short of expectations, risk of fluctuations in raw material prices, risk of macroeconomic fluctuations.