Core views

The company's revenue and profit declined in the first half of 2023. First, due to chip shortages in the same period last year, operators stepped up stocking up. In the first half of last year, the pace of delivery was faster and the base was high; second, the small to medium module business, which includes the company's professional display business, was affected by weak sales volume in the mobile phone market. The unit price of orders fell and gross margin fell significantly year-on-year.

It is expected that with the launch of a new round of home gateway tenders for subsequent telecom operators, the company's broadband connection business will usher in relatively rapid growth. In addition, the company's overseas business, vehicle display, and XR will continue to break through, and the company's business situation is expected to improve in the second half of the year.

occurrences

Recently, the company released its semi-annual report. In the first half of 2023, the company achieved operating income of 5.170 billion yuan, a year-on-year decrease of 17.15%; realized net profit of 318 million yuan, a year-on-year decrease of 35.36%, gross margin of 16.67%, and net operating cash flow of 360 million yuan, a year-on-year decrease of 67.98%.

Brief review

1. The high base figure for the same period last year indicates a decline in performance in the first half of the year due to the drag on the module business.

In the first half of 2023, the company achieved revenue of 5.170 billion yuan, a year-on-year decrease of 17.15%, and achieved net profit of 318 million yuan, a year-on-year decrease of 35.36%. In the first half of 2022, the company's gross margin was 16.67%, down 1.52 pct from the previous year. In a single quarter, 2023Q2 achieved revenue of 2,828 billion yuan, a year-on-year decrease of 18.50%; realized net profit of 200 million yuan, a year-on-year decrease of 29.29%. The company's revenue and profit declined. First, because in the same period last year, due to chip shortages, operators stepped up stocking up. In the first half of last year, the pace of delivery was fast and the base was high; second, the small to medium module business, which includes the company's professional display business, was affected by weak sales volume in the mobile phone market. The unit price of orders fell and gross margin fell significantly year-on-year. It is expected that with the launch of a new round of home gateway tenders for subsequent telecom operators, the company's broadband connection business will usher in relatively rapid growth. In addition, the company's overseas business, vehicle display, and XR will continue to break through, and the company's business situation is expected to improve in the second half of the year.

In terms of cost rate, the 2023H1 company's expenses rate for the period was 10.26%, down 1.04 pct from the previous year. Among them, the sales expense rate decreased by 0.43 pct, mainly due to a decrease in after-sales service fees and sales commission rewards; a decrease of 0.20 pct in management expenses, mainly due to a decrease in employee remuneration; a slight increase in R&D expenses and a decrease in financial expenses of 1.36 pct, mainly due to interest expenses on non-convertible bonds and a sharp increase in exchange earnings.

2. Following the Pancake ultra-short focus VR all-in-one, the company actively deployed MR/AR.

According to IDC data, global AR/VR headset shipments in 2022 were 8.8 million units, down 20.9% year on year. It is expected to be mainly affected by the macroeconomic environment and the immaturity of the VR ecosystem. As various manufacturers launch consumer-grade VR/AR terminals, especially Apple's Vision Pro, developers can apply for a Vision Pro developer kit (developer kit) on Apple's official website. The kit allows developers to quickly build, iterate, and test applications on Vision Pro, and helps developers provide excellent applications and spatial experiences, which will help the VR ecosystem further mature.

In July 2022, the company released the Pancake Ultra Short Throw VR all-in-one, targeting the customized market for industry application solutions, the To-B side operator market, and the To-C side retail market. Currently, the company is focusing on expanding XR industry application customers in Japan, the United States, South Korea, and India. In addition, the company is also forward-looking in the MR/AR field. In June 2023, Skyworth XR reached a strategic cooperation with an Indian customer to provide customized MR products and equipment services for Indian customers. Its MR products support gesture recognition, eye tracking, and RGB VST high-definition color perspective functions. Product performance and functions have been upgraded to provide users with a new MR experience. Also, in terms of AI and AR/MR, based on the relevant needs of overseas customers, relevant teams are developing light-interactive AR glasses to achieve basic functional interaction through the combination of AI and AR. What you see is what you get.

3. The company has a stable leading position in the set-top box business, and the share of home gateways continues to increase.

In terms of smart set-top boxes, the company's share of mobile and Unicom is stable, and telecom's share is high. In China Mobile's new round of smart set-top box collection and bidding, the company ranked first with a total share of 28.39%; in China Unicom's tenders in the first half of the year, the company successively won exclusive bids for the Henan Unicom IPTV set-top box project, Shandong Unicom's 4K smart set-top box project, Shanxi Unicom's 3.0 set-top box open market centralized inquiry and procurement project, and the Liaoning Unicom 4K smart set-top box project.

The company's share of smart home gateways continues to rise. In March 2023, the company won the bid for China Telecom broadband integrated terminal collection with an 11% share (fourth place); in China Mobile's 2022-2023 smart home gateway product collection, all 6 products and 5 standard packages won the bid (third, fourth, third, third, and first place respectively), ranking first in the total number of winning bids; in China Unicom's first collection of smart home gateways, the company successfully won the bid at a higher price. In addition, the company has also achieved certain breakthroughs in its broadband connectivity business in India, Southeast Asia, Europe, etc. Based on the company's resources and strategic partnerships with global overseas operators, channels, etc., and strategic partnerships, it is expected that the overseas broadband connection business will maintain a high growth rate in the future.

4. The automotive display business continues to target new models and is expected to grow rapidly in the future.

The company provides products such as vehicle human-computer interactive display assembly systems and vehicle intelligent instrument display systems. In the first half of 2023, the company continuously obtained display assembly project targets for a number of star models, including the Changan Avita E12 display project target (the winning product is 100% standard for this model); the FAW Pentium Sedan Co., Ltd. model project. As the third and fourth quarters ushered in the peak delivery season, the company's on-board display business revenue growth is highly certain.

5. Profit prediction and risk warning.

The company's leading position in the set-top box business is stable, the share of home gateways continues to rise, the overseas home broadband business is growing rapidly, and the VR and vehicle display business continues to break through. We expect the company's net profit to be 866, 11.90 million yuan, and 1,476 million yuan respectively in 2022-2024. The corresponding PE is 19X, 14X, and 11X, maintaining the “buy” rating.

Risk warning: Chip supply is tight, products that are highly dependent on imports, such as switching chips and main control chips, may be out of stock; set-top box shipments fall short of expectations, domestic operators' 4K and 8K penetration rates have slowed down, competition in overseas markets has intensified, and gross margin has declined; gigabit broadband development falls short of expectations, new entrants have led to increased market competition; VR business development has fallen short of expectations, VR display and optical technology development has fallen short of expectations. The VR terminal competition pattern worsens. Decline; VR, in-vehicle display business The large investment in the early stages of development had an impact on the company's profits.