The company's revenue fell slightly in 2022, and profits were under pressure, mainly because the overseas demand boom continued but domestic downstream demand was at the bottom. At the same time, the company's inventory reached a healthy level at the end of 22Q4. As the 23Q1 overseas boom continued and domestic bottomed out and recovered at the same time, 23Q1 revenue picked up year on year, and profits rose higher year on year. The main reason was that overseas business continued to grow rapidly, domestic sentiment recovered from the bottom, and the profit side increased year-on-year as costs and expenses improved. In the short term, overseas sentiment is expected to continue, and domestic demand is expected to gradually pick up. The company continues to increase its Mini LED display business, accelerate the layout of emerging display markets and technology, and expand production capacity. We are optimistic about the company's development for a long time, as well as the company's leading position in the display industry and the layout of Mini LED. Profits are expected to rise throughout the year and be raised to the “buy” rating.

The company's 2022 revenue/net profit attributable to the mother was -2.12%/-65.16%, mainly because domestic market demand has yet to be released, and impairment pressure has been released at the same time. The company achieved revenue of 7.076 billion yuan in 2022, -2.12% year on year; net profit returned to the mother was 63 million yuan, -65.16% year-on-year, net profit of 53 million yuan after deduction, -52.58%, mainly due to continued overseas demand but domestic downstream demand was at the bottom. At the same time, impairment pressure was released: the company calculated various credit impairment losses and asset impairment preparations totaling 394 million yuan in 2022, of which 23 million yuan was goodwill impairment losses and asset impairment preparations totaled 394 million yuan, of which 23 million yuan was due to impairment losses and asset impairment preparations of 126 million yuan Yuan. If you add back the deducted value, the company's net profit to the parent/after deducting non-net profit was 457/447 million yuan, respectively. By region, domestic/overseas revenue was 30.06/4,070 billion yuan respectively, or -31.48%/+43.18%, respectively, and the business share was 42.48%/57.52% respectively. By business, the company's three revenue segments of smart display/intelligent lighting/cultural and creative lighting in 2022 were 64.22/494/081 million yuan respectively, accounting for 90.76%/6.98%/1.14% respectively, compared to +5.02/-0.61/-4.86pcts. Among them, the smart display business is still the main source of revenue, and the share of smart lighting and cultural and creative lighting has declined. Looking at gross margin, the overall gross margin was 26.80%, +2.53 pcts compared to the previous year, mainly due to the share of overseas businesses with higher gross margins of +18 pcts. On the cost side, the company's sales/management/finance/R&D expenses ratio was 12.02%/4.87%/-0.78%/4.94%, respectively. The year-on-year rate was +2.10/+0.40/-1.99/+0.73pct respectively, and the overall expense ratio was +1.23pcts year-on-year. The increase in sales expenses was mainly due to the company's promotion of overseas market expansion and channel layout. The negative increase in financial expenses was affected by exchange rate fluctuations and increased exchange earnings. Looking at 22Q4, the company achieved revenue of 2,160 million yuan, -9.83% year on year, +23.44% month on month; net profit of returned to the mother - 190 million yuan after deduction - 203 million yuan; gross profit margin 25.23%, +3.53 pcts year on year, -3.99 pcts month-on-month, mainly due to low domestic demand and the impact of the epidemic. At the end of 22Q4, the company used a positive strategy to take inventory while depreciation pressure was fully released. At the end of 22Q4, the company's inventory had reached a healthy level.

Profitability improved dramatically in 23Q1, and profits are expected to increase throughout the year as industry sentiment recovers. The company achieved revenue of 1,628 billion yuan in 23Q1, +5.21% year on year and -24.67% month on month. Among them, overseas business accounted for about 60%, with a growth rate of more than 30%. The boom was resilient, and domestic orders increased significantly from March to March. 23Q1 achieved net profit of 145 million yuan, +86.24% year on year; net profit after deduction was 137 million yuan, +120.76% year on year, gross margin was 32.14%, +7.51 pcts year on year, mainly due to the fact that overseas businesses with high gross margins were still growing rapidly. High value-added businesses such as XR virtual shooting continued to grow. At the same time, the bottom of raw material costs stabilized, and operating efficiency optimization increased per capita income generation. Looking ahead to 2023 as a whole, we expect that domestic market demand will gradually be released, and the company's domestic performance is expected to grow significantly. The growth rate may converge while the overseas economy maintains, but the high-value-added business will upgrade the product structure; at the same time, the company's cost side will improve significantly, depreciation pressure will be greatly reduced, and profits are expected to rise.

Innovative applications are on the rise, and the company's virtual shooting, cinema, and AI digital virtual person layout have broad prospects.

In terms of virtual shooting, the company uses “LED large screen+XR technology” technology. The subsidiary Radio has built a large number of international high-end XR virtual studios around the world and is deeply involved in the international high-end display field. Radio's total revenue in 2022 was 1,663 billion yuan, +22.04% over the same period last year, and its competitive position is expected to continue to strengthen in the future. In terms of LED cinemas, the company has been deeply involved in the field of cinema screens for many years. The products UC-A41 LED cinema screen and UC-A21 movie screen have been the first to pass Hollywood DCI certification. In the future, the company plans to continue to cooperate with leading companies in the field of international cinema equipment to further develop cinema LED displays and solutions. With the recovery of the film market in the post-pandemic era, it is expected that the company will usher in new performance growth points. In addition, the company has reached cooperation with Microsoft, Shangtang Technology, etc. to actively lay out AIGC and other businesses and optimize product solutions. Subsequent fields such as digital virtual people, XR virtual shooting, naked eye 3D, and VR/AR are expected to gradually contribute to revenue.

Mini LED costs have been reduced significantly, and the gradual release of the company's production capacity is expected to contribute to the main business revenue. The company focuses on ultra-small spacing and mini LED commercial display markets, continuously increasing project research and development to increase industry concentration. In terms of product technology, the company's COB and MIP packaging methods go hand in hand. The product performance is excellent, which can increase screen energy efficiency by 50% and increase the reliability of lamp beads by 10 times. In August 2022, the company launched a new product, uMicro P0.4. Using COB full reversal technology and EBL+ (Enhance Black Level+) multi-layer optical processing technology, key technical indicators and performance were further improved. In terms of production capacity, the company has expanded the Daya Bay Phase II Mini/Micro production line base. Currently, the total production capacity has reached 20,000 KKK/month, and is expected to gradually rise in the future. In terms of product costs, the Mini LED supply chain continues to mature, with an annual decline of more than 20% in the past three years. The company's UMini COB costs are expected to be further optimized under future scale effects. Furthermore, the company has achieved comprehensive technological upgrades and has now formed a complete P0.4-P1.8 product line, and UMinI II P0.7, P0.9, and P1.2 have been mass-produced and sold on a large scale. Looking ahead, we expect strong demand for ultra-small spacing and mini LEDs. The company's active expansion of production capacity will contribute significantly to the revenue of the main business and maintain the company's leading position in LED displays.

Risk factors: Risks such as exchange rate fluctuations, weak downstream demand, increased industry competition, slow technological upgrading, and repeated local epidemics.

Investment advice: To show that the company is a leader in the field, the overseas demand boom continued in 2022, but domestic downstream demand was at the bottom, and overall performance was under pressure; domestic sentiment recovered from the bottom in 23Q1, compounded by improvements in costs and expenses, and the profit side increased year-on-year. The short-term overseas boom continues, and domestic LED demand is expected to gradually pick up. The company continues to increase its Mini LED display business, accelerate the layout of emerging display markets and technology, and expand production capacity. We are optimistic about the company's development in the long term. Due to significant cost side improvements and profit side optimization in 2023, we raised the company's 2023-24 EPS forecast to 0.54/0.70 yuan (0.43/0.52 yuan), and added the 2025 EPS forecast to 0.91 yuan. We selected LED display companies Abison and Liard as comparable companies. According to Wind's unanimous expectations, the average PE value of comparable companies in 2023 was 15 times. Referring to the valuation level of comparable companies, 20 times PE in 2023 was given. The corresponding target price was 10.8 yuan, which was raised to the “buy” rating.