1H23's performance fell short of our and market expectations
Gaowei Electronics announced 1H23 results: revenue fell 9% year on year to 367 million US dollars, and net profit from Homo fell 43% year on year to 0.18 million US dollars, lower than the market's previous expectations by 50%, and lower than our previous expectations of 58%. The company's performance in the first half of the year was under short-term pressure. We think the main reasons are: 1) the shipment performance of the 1H23 North American customer Pad products fell short of market expectations, affecting the company's revenue performance; 2) the rising production capacity of major North American customers required more investment, and the increase in cost rates had a negative impact on profits; 3) the exchange rate of the RMB against the US dollar fluctuated in the first half of the year, or due to a decline in exchange earnings over the same period. Looking ahead to 2024, we believe that Gaowei Electronics is gradually becoming one of Lixun Group's important strategic puzzles. We are optimistic that the company will expand its business footprint in the field of rear cameras and MR camera modules for major North American customers, and will gradually become one of the core suppliers of optical modules for major North American customers in the future.
Development trends
The 1H23 Pad product is affected by terminal shipments and is under pressure in the short term, and the introduction of new products is poised to begin. Looking back at 1H23, according to IDC, iPhones shipped 100 million units, down 2% year over year; iPad shipped 21.3 million units, down 13.8% year over year. As one of the main suppliers of mobile phone front cameras and tablet front and rear cameras for major North American customers, we expect Gaowei Electronics' mobile phone module shipments to remain steady in the first half of the year, but revenue from tablet module products may be under short-term pressure due to weak terminal shipments. Looking ahead to the second half of the year, we are optimistic that Gaowei Electronics will maintain its leading supply chain position for major North American customers with its high-quality management experience and manufacturing capabilities. In the long run, based on the scarcity of FC production lines and the company's capital expenditure investment, we believe that the company may be expected to enter rear camera products for major North American customers in 2024. Considering that the rear camera market is several times larger than front cameras, the successful introduction of new products may reflect a significant increase in the company's performance.
The MR optical layout is comprehensive, and the second growth curve is imminent. We believe that the upgrade in the number of cameras installed is expected to boost the interactive performance of MR products. Along with the preparation of the Apple Vision Pro at the end of the year, it may make a partial incremental contribution to the company's revenue.
Profit forecasting and valuation
The current stock price of the company corresponds to 24.8 times 2023 and 13.4 times the price-earnings ratio of 2024. Considering the weak demand for tablets from major North American customers in 2023 and the visibility of mobile orders to be seen, we lowered the company's 2023/2024 profit forecast by 42%/23% to 0.57/105 million US dollars. We are optimistic that the company will continue to gain new shares in mobile camera products from major North American customers with its excellent manufacturing capabilities and maintain an outperforming industry rating. However, considering that the current inflection point of market demand for 2H23 phones is still in the wait-and-see stage, we lowered our target price by 16% to HK$19.4, corresponding to 37.3 times the price-earnings ratio in 2023 and 20.1 times the price-earnings ratio in 2024. There is room for 50.2% increase from the current stock price
risks
The customer structure was a single risk, and the upgrade of automotive optical products fell short of expectations.