Performance review

2Q23's performance was lower than we expected, mainly due to overseas demand pressure and losses in mobile phone modules and other businesses.

The company announced 1H23 results: 1H23 company income 5.17 billion yuan, year-on-year-17.1%; return to the mother net profit 318 million yuan, year-on-year-35.4%; deduction non-return mother net profit 323 million yuan, year-on-year-27.3%.

Corresponding to 2Q23, the company achieved income of 2.828 billion yuan, year-on-year-18.5%, net profit of 200 million yuan, year-on-year-29.3%, and non-return net profit of 211 million yuan, year-on-year-15.0%. The company's performance was lower than we expected, mainly due to lower-than-expected sales of overseas set-top boxes and losses in business such as mobile phone modules.

In terms of revenue, overseas demand fell, and domestic unit prices fell: 1) according to the General Administration of Customs, the export volume of 2Q23 and 7M23 Chinese set-top boxes was-26.8% and-44.3% respectively compared with the same period last year; and the export volume (in US dollars) was-42.1% and-52.9% respectively. The decline in broadband equipment is also significant. The export volume of 2Q23 and 7M23 Chinese routers is-14.0% and-32.6% respectively compared with the same period last year, and the export volume (in US dollars) is-14.4% and-41.6% respectively. The downward trend in exports has not improved, resulting in 1H23's export revenue of-17.4% compared with the same period last year.

2) 1H23's domestic sales revenue is-17.0% respectively compared with the same period last year, mainly due to the downward price of products and the adjustment of the purchasing cycle of some operators. 3) from the perspective of business, 1H23 intelligent terminal business revenue is-27.7% compared with the same period last year; professional display business income is + 40.9% compared with the same period last year, mainly due to the increase in designated automobile projects and the low base effect, including the new growth of 1H23 Anavita and FAW Pentium projects Operating service revenue is + 19.8% year-on-year, including the company's newly established energy storage company in April this year, which mainly carries out domestic industrial and commercial energy storage, overseas channel sales and EPC model business.

In terms of profit, the loss of the mobile phone module business is a drag on the performance: 1) the company's 2Q23 gross profit margin and home net profit margin are year-on-year-2.7ppt and-1.1ppt to 16.5% and 7.1%, respectively. 2) 1H23's gross profit margin for domestic and export sales is-4.8ppt and + 3.5ppt to 13.6% and 21.4% respectively, and exports benefit from product upgrading. In addition, the exchange gain of 1H23 Company is 34.66 million yuan. 3) by product, the gross profit margin of 1H23 smart terminal is from + 2.2ppt to 22.1% compared with the same period last year; the gross profit margin of professional display business is from-7.7ppt to-0.9% compared with the same period last year, mainly due to the loss of mobile phone business; and the gross profit margin of operating business is basically the same.

Trend of development

AIGC is an interesting spot, and there is no obvious inflection point in XR business: 1) the company announced that in April this year, it has signed an Azure enterprise service agreement (including GPT 3.5,4.0 application services) with Microsoft Corp, and will launch subscriptions in many international regions overseas. 2) in terms of XR, the company focuses on expanding B-end customers in Japan, the United States, South Korea, India and other places. In addition, the company announced that the team is developing AR glasses with light interaction.

Profit forecast and valuation

Due to the pressure on overseas demand, we cut our net profit by 21% and 16% to 750 million yuan and 910 million yuan in 2023 and 2024 respectively. The current share price corresponds to 21 times in 2023 and 17 times earnings in 2024. The company maintains a leading position in the bidding of operators and maintains a rating that outperforms the industry. Due to the lower-than-expected results and the downward valuation of the industry, we lowered our target price by 24% to 17.00 yuan, corresponding to 26 times earnings in 2023 and 22 times earnings in 2024, which has 27% upside compared to the current share price.

Risk

New business development is less than expected risk, market demand fluctuation risk, market competition risk.