In the first half of 2023, the company achieved main business revenue of 367 million US dollars, -9.35% year-on-year; realized net profit of 1.83 million US dollars, -42.6% year-on-year. Overall, the company's profit performance is relatively weaker than its revenue performance. We believe it is mainly due to the decline in product prices affecting the level of gross margin, the high cost of high-end new products during the investment phase, and the limited contribution of combined exchange earnings. We are optimistic about the company's strategic layout and market position. We expect the company's EPS from 2023-2025 to be HK$0.55/0.97/1.56, maintaining a “buy” rating.

The company's revenue and profit for the first half of 2023 were -9.35%/-42.6%, respectively. Profit performance was weaker than revenue due to pressure on the price side plus high investment on the R&D side; looking at the whole year, we expect performance to be low and then high. In the first half of 2023, the company achieved main business revenue of 367 million US dollars, -9.35% year-on-year, of which customer A accounted for 96.5% of revenue (year-on-year -3.2pcts). We believe that the decline in the company's revenue side was mainly due to pressure on tablet business volume and price (according to data transferred from IDC by Veko Network, Q1/Q2 A customer tablet shipments in 2023 were -10.2%/-16.8%); we estimate that the company's mobile phone business is still growing year on year, mainly due to a year-on-year increase in mobile phone pre-consumption value (but a decrease from month to month). The company's gross margin for the first half of the year was 13.87%, -0.99pct year-on-year. We think it was mainly due to the decline in product ASP. In terms of expenses for the period, the company's sales expenses rate, management expenses rate, and financial expenses rate for the first half of the year were 0.25%/8.57%/0.86%, respectively, compared to +0.06/+1.42/+0.44pct, respectively. The increase in the cost rate during the period led to the company's net interest rate of -2.86pcts to 4.73% year-on-year. Overall, the company achieved net profit of US$1.83 million in the first half of the year, with a year-on-year rate of -42.6%. Profit performance was relatively weaker than revenue performance. We believe it was mainly due to falling product prices affecting gross margin levels and high-end new products being in the investment stage, high expenses during the period, and limited contribution to combined exchange earnings. Considering that the second half of the year is the traditional peak season for A customers, we expect performance to be stronger than the first half of the year.

The company is the core beneficiary of A customer's mobile phone optical+MR products. We are optimistic about the company's medium- to long-term growth logic.

(1) Customer A's traditional business: Currently, the company is the top two suppliers of tablet front-camera module+mobile phone front-camera module for customer A. Looking forward to the future, we think the company is expected to benefit from a steady increase in front-camera share+post-camera number expansion on mobile devices. We estimate that the market size of customer A's front/rear camera module is US$2010/100+ billion US dollars, respectively. The company's subsequent expansion of the product model is expected to open up room for growth. (2) MR: The company has taken advantage of many years of cooperation with customer A to successfully enter customer A's MR product camera module business, and is highly profitable and flexible among customer A's MR product suppliers. We are optimistic about the growth of the company's MR business. (3) Vehicle business: The company has rich experience in assembling and testing lens modules and optical components, and has successfully entered the assembly, calibration and factory testing business of Suteng Juchuang lidar. Sagiteng adopted the “905nm+ MEMS” technology route and won mass production orders from many passenger car companies. The company is expected to achieve performance growth along with the rapid increase in Suteng Juchuang's shipment volume in the future.

Risk factors: The competitive pattern deteriorated; downstream demand fell short of expectations; customer A's mobile phone optical specifications were upgraded more slowly than expected; the company's new product yield was lower than expected; the gross margin of the company's new products was lower than expected; development in the ADAS field was slow; performance uncertainty brought about by changes in Sino-US relations exceeding expectations.

Profit prediction, valuation and rating: The company is the world's leading supplier of camera modules. It has been deeply involved in the industry for more than 20 years and is deeply linked to the A customer industry chain. At this point, we are optimistic that the mobile phone market share of Company A's customers will further increase and the number of materials will expand; in addition, the company is currently actively laying out AR/VR business and horizontally expanding automotive lidar products, which is expected to further open up room for growth. We are optimistic about the company's medium- to long-term growth logic. Considering that downstream demand is weaker than expected and the ASP for the superimposed camera module product is under short-term pressure, we adjusted the company's 2023-2025 EPS forecast to HK$0.55/0.97/1.56 (previous forecast value was HK$0.86/1.17/1.62). As of August 15, 2023, the company's PE is 25x. It is comparable to the company's Shunyu Optical Technology (customers cover A customers and Android, layout mobile camera modules, AR/VR camera modules, automotive lidar, etc.), Lante Optics (customers cover A customers, Sagiteng Juchuang, etc., and layout upstream camera modules such as optical prisms, glass aspherical lenses, and glass wafers. The products are used in mobile phone periscope lenses, vehicle lidar and other products), Yongxin Optics (provides automotive lidar optical components, etc.) Rotating, semi-solid The average PE value for various types of lidar (solid-state lidar, etc.) in 2023 is 29x (wind unanimously expected). We expect the company's profit growth rate in 2024/2025 to reach 75%/61%, respectively (for comparison, the average profit growth rate of the comparable companies for the same period was 36%/32%, respectively). Considering the future growth space of the company's mobile camera business and the valuation premium brought about by the high growth of MR and automotive lidar, we gave the company a target PE of 36x, a target share price of HK$20, and maintained a “buy” rating.