Revenue increased slightly in the first half of the year, and performance was under pressure. The company's 2023H1 revenue was 5.2 billion Hong Kong dollars, up 8% year on year, mainly due to an increase in TFT and touch screen display module production capacity, an increase in overall production and sales volume in the downstream NEV market. At the same time, the rising exchange rate had a small negative impact on the company's revenue. Looking at the structure, automotive displays and industrial displays earned HK$4.65 billion/HK$560 million respectively, accounting for 89% and 11% respectively, and +7%/+14% year-on-year. In terms of profit, the company's EBITDA was 320 million, down 10% from the previous year, and the EBITDA profit margin was 6.2%, down 1.2 pct from the previous year.

Affected by factors such as downstream price adjustments, inventory impairment, and a rise in production capacity in the Chengdu factory, the company's net profit for the first half of the year decreased 19% year on year to HK$200 million. The net profit margin for the first half of the year decreased by 3.9%, a year-on-year decline of 1.3 pct.

Combining forces at home and abroad: the new plant in Chengdu will increase production capacity and increase investment in overseas resources. The company's automotive display business had revenue of HK$4.6 billion in the first half of the year, +7% year-on-year. The company continues to maintain the number one market position in the global automotive display module market in terms of shipping volume, shipping area, and large size shipping area. 1) On the domestic side, production capacity at the Chengdu base is rapidly rising. After production was put into operation last year, production more than doubled in the first half of this year. As one of the most advanced automotive display module factories in the world, the Chengdu module base has a complete process chain and can provide customers with one-stop solutions. Looking ahead to next year and beyond, the Chengdu base is expected to provide important support for the company's profitability. 2) On the overseas side, on the basis of last year's rapid layout, the company has further set up an overseas business team, and the number of high-quality customer targets has continued to increase year-on-year. We expect that from 2024-2025, with the gradual release of orders related to overseas designated models, overseas business will continue to develop rapidly, and it is expected to contribute about half of the company's revenue in 2025.

From module to system: rapidly developing the automotive systems business. While developing traditional display modules, the company is also focusing on developing emerging businesses such as automotive systems business and CMS. It continues to cooperate with customers to develop related products and continuously win orders. Judging from the market size, according to Omdia, the automotive display system market is rising steadily, and the Chinese market is expected to reach nearly HK$100 billion in 2026. As a new entrant in the system industry, BOE Precision has a small share in the automotive display system market, and there is plenty of room for growth. We expect the company's systems business to double this year.

Profit fluctuated in the first half of the year, and is expected to rise steadily over the long term. The gross margin of the 2023H1 company was 6.3%, and the net profit margin at the parent level was 3.9%. There was some fluctuation due to downstream price adjustments, accrued inventory impairment, and the rise in the Chengdu factory.

Looking at the long term, as the new factory gradually climbs to bring economies of scale, an increase in the share of overseas business, and a gradual increase in the share of Tier 1 business, we are still optimistic about the company's long-term profitability, and the annual profit margin is expected to gradually increase in the future.

Investment advice: We expect total revenue of BOE Precision to be about HK$118/160/HK$201 billion for 2023-2025, +10%/+35%/+26% YoY, and net profit of HK$5.2/8.2/1.19 billion, or -12%/+45% YoY.

The P/E multiples for 2023/2024/2025 corresponding to the current stock price are 11.3x/7.1x/4.9x respectively, maintaining “buying”

ratings. We are optimistic about innovative trends such as multiple screens and larger screens for cockpit displays, and we are also optimistic about the company's accumulation of new products and technologies. We expect the company to be the “screen master” of automotive displays benefiting from these trends.

Risk warning: Demand for large and multi-screen automotive displays fell short of expectations, on-board display race track competition exceeded expectations, panel market prices fell short of expectations or costs exceeded expectations, and overseas orders fell short of expectations.