The company 23H1 achieved revenue of HK$5.210 billion, +7.85% year-on-year, mainly benefiting from an increase in smart cockpit penetration. At the same time, as a global automotive display leader, the company's position is stable and its share continues to increase; net profit of HK$203 million, -19.28% year-on-year, was mainly due to price reductions at the beginning of the year and increased costs of climbing the new Q2 production line, as well as the impact of depreciation. Looking ahead to 23H2, the global automotive display module market is growing significantly. Coupled with the expansion of the company's production capacity, increased supply capacity, and continuous expansion of the product matrix to gain market share, the company is expected to further open up profit space. In the long run, we are optimistic that the company will increase revenue scale and profitability through vehicle display volume. At the same time, the company will lay out a “three-step” strategy to open up incremental space through in-vehicle display system assembly and smart cockpit business, and maintain “buy” ratings.

The global automotive display market share increased again, with the company's revenue/net profit at +7.85%/-19.78%, respectively. In terms of profitability, the company achieved revenue of HK$5.210 billion in 23H1, +7.85% year-on-year. The main beneficiary company continued to expand in-vehicle display modules, and the company's market share continued to increase under the trend of intelligent automobiles. According to Omdia, 23Q1 ranked first in total vehicle TFT shipments and shipping area, with a market share of 17.5%/20.1%, respectively. 23Q1 maintained the top ranking in global vehicle display shipments of large size (8 inches or more), at 22.0%, and the leading position in automotive displays worldwide. 23H1 achieved an EBITDA of HK$324 million, -9.75%, and an EBITDA rate of 6.22%, year-on-year -1.21 pcts, homogenous net profit of HK$203 million, year-on-year, -19.78%, net interest rate of 3.89%, year-on-year -1.31 pcts. The decline on the profit side was mainly due to price reductions by OEMs, which led to lower product prices at the beginning of the year. The company calculated inventory impairment. At the same time, the new production line for modules in Chengdu is still in the production capacity climbing stage, and the scale effect has not been fully reflected. According to the company's performance, if impairment and the impact of the Chengdu factory are excluded, 23H1's return profit margin level is equivalent to 5.4% of FY2022. Looking ahead to 23H2, we expect product prices to stabilize, some depreciation may be expected to return, and shipments are expected to recover first. At the same time, as production capacity in the Chengdu production line climbs and customer orders are actively introduced, the scale effect is expected to be unleashed, the 23H2 revenue side is expected to accelerate growth, and there is still room for repair on the profit side.

The domestic automotive business is the main growth engine, and overseas revenue is expected to increase significantly in the future. By business, 23H1 automotive/industrial display revenue was HK$46.46/564 million, respectively, +7.17%/+13.71%, respectively, and revenue accounted for 89.17%/10.82% of revenue; the automotive business accounted for -0.56pct of revenue. The increase in absolute revenue mainly benefited from the increase in overall sales volume of new domestic new energy vehicles, strengthened company production capacity and increased market share. By region, 23H1 domestic/overseas revenue was HK$37.06/1,504 million, respectively, +12.78%/-2.59%, accounting for 71.13%/28.87%, and the share of domestic revenue was +3.11pcts year on year. 1) Domestic market: The company maintains the market ranking among leading OEMs, and its market share continues to increase. According to the company's performance, 23H1's coverage rate of total automobile production in China reached 50%, +20 pcts; in the total production of mainstream new energy vehicles, the coverage rate reached 60%, +19pcts over the previous year. The company is also further feeding back domestic OEMs to help domestic brands go overseas faster. 2) Overseas market: 23H1 Europe/America/South Korea each contributed 51%/23%/11% of overseas revenue, respectively, -2%/+16%/-12%, respectively. Overall, it is still affected by macro-pressure. In the European market, Germany and France each contributed 10%/5% of overseas revenue, +15%/87% of the same period, respectively, and the company's customers are progressing positively. Looking at the new targets, 23H1 overseas targets increased steadily year-on-year. The European and American high-end screen target projects were basically the same as in 2022. The top European and American brand projects have surpassed 2022, and continue to maintain the position of the number one supplier for the largest overseas customer, continuously improving product quality. We expect that with the gradual release of targeted projects that the company has harvested in the past two years, the company's overseas revenue is expected to increase significantly from 2024. At the performance conference, the company stated that overseas revenue is expected to grow rapidly in 24 or 25, and that the revenue ratio will increase rapidly.

Chengdu's module production capacity is about to be released, new products are being introduced in the system assembly business, and the “three-step” strategy is progressing smoothly.

Relying on the Group's production capacity, customer and cost advantages, the company runs its own production in parallel with ODM, adheres to an asset-light strategy, and lays out a “three-step” strategy for automotive displays, display systems and smart cockpits. 1) Looking at in-vehicle display devices, the Chengdu Vehicle Display Base, a wholly-owned subsidiary of the company, has a design production capacity of about 15 million units/year. The base has already entered the first phase of production ahead of schedule in November 2022, and production capacity has more than doubled in 23H1. The 23H1 has already been mass-produced in size covering 1.95-44.8 inches, and the company expects to fully release design production capacity within the year. 2) Looking at the expansion of the industrial chain, the vehicle display system and the smart cockpit market are expected to become the company's two major performance growth points. According to the company's interim report and mid-term results conference, in terms of in-vehicle display systems, the screen system assembly business has been exclusively for Xiaopeng G9, G6, and P5 instruments. It has successfully supplied Starway's dual 12.3-inch curved Mini LED instrument central control screen. NIO ES6 is also equipped with BOE's 12.8-inch AMOLED central control, FAW Hongqi, Hyper GT, Feifan, and Nacha are also operating with the company's screen systems Establishing Partnership: AR-HUD products have been shipped to BAIC Rubik's Cube, 23H1 has launched the world's first 14.6-inch QHD oxide product and has entered mass production; in terms of smart cockpits, the company strives to create a “HERO” complete solution, covering healthiness (healthiness), entertainment (entertainment), leisure (relaxation), and office (Office). 23H1 has launched the world's first 42.5-inch 10K multi-function smart cockpit product and won SID People's ChoiceAwards, the world's first 24.6-inch CMS (electronic exterior rearview mirror) has been certified, and mass production and delivery are imminent. With the official implementation of the “Motor Vehicle Indirect Vision Device Performance and Installation Requirements” standard in July 2023, CMS vehicles can officially and legally enter the road, and will become a key driving force for major car companies, helping the company usher in new development opportunities. In the long run, the smart cockpit business is expected to open up broad space for growth.

Risk factors: Industry competition heightens risks; downstream demand falls short of expectations; customer progress falls short of expectations; company capacity expansion falls short of expectations; new product development and commercialization falls short of expectations.

Investment advice: In the long run, we are optimistic that the company will increase revenue through overseas projects, drive a rise in profitability as costs drop, and open up room for growth. At the same time, the company laid out a “three-step” strategy to open up incremental space with in-vehicle display system assembly and smart cockpit business. In the short term, the company relies on the Group's advantages to continue to expand its share, and its leading position is expected to strengthen, but as the price of terminal vehicles drops, the competitive landscape becomes more intense, and the Chengdu vehicle display base climbs, the short-term profit side growth rate will not be as fast as the revenue side. We lowered the company's net profit forecast for 2023/24 to HK$492/798 million (the original forecast was HK$682/821 million). Considering the company's positive future goals, high overseas target growth, and future growth, we raised the company's net profit forecast for 2025 to HK$1,098 million (the original forecast was HK$1,001 billion). We selected Lansi Technology, Changxin Technology, Dongshan Precision, and leading automotive system assembly business manufacturers Huayang Group and Junsheng Electronics as comparable companies. The average PE value of comparable companies in 2023 was 20.7 times. We gave the company 20 times PE in 2023, corresponding to a target price of 12 yuan, and maintained a “buy” rating.