3Q23 performance fell short of our expectations

The company announced 1-3Q23 results: 1) Revenue of 15.383 billion yuan, -4.1% year-on-year; net profit of 1,061 billion yuan, -33.4% year-on-year. 2) Corresponding to 3Q23, revenue was 7.046 billion yuan, -0.3%; net profit was 459 million yuan, -49.9% year-on-year. 3) The company's performance fell short of our expectations, mainly due to weak demand and increased competition in the interactive tablet industry, which put pressure on revenue and profits.

Domestic demand for intelligent interactive large screens is weak and competition is intensifying: 1) After experiencing high growth in the domestic IFPD market in 2020-2021, the growth rate began to decline in 2022. 1H23 education/commercial IFPD shipments were -20%/-30% year-on-year respectively (Lotto Technology data). We estimate that 3Q23 will continue the weak demand trend. 2) The company's market share has continued to rise since the beginning of the year, but industry competition has intensified against the backdrop of weak demand, and the average price has declined markedly, dragging down the performance of domestic education and corporate services businesses in 3Q23. 3) According to industry online data, the domestic sales/export volume of color TV from July to August 2023 was -4%/+3%, respectively. The company gradually strengthened cooperation with leading color TV brands. We estimate that the performance of the traditional components business in 3Q23 was relatively steady.

The overseas de-inventory cycle has basically ended, and the ODM business has begun to recover: downstream customers of overseas interactive tablets entered the de-inventory cycle in 2H22, which has gradually come to an end since 2Q23. Combined with the low base for the same period last year, we estimate that the company's 3Q23 overseas business resumed impressive year-on-year growth. Among them, the performance of emerging markets may be better than the US market, and we expect continued improvement in the future.

External competition is fierce, and the company's profit is under pressure. 1) Competition in the domestic education business industry intensified in 3Q23. At the same time, due to the increase in the structural share of overseas business (mainly ODM) revenue with relatively low gross margin, the company's 3Q23 gross margin was -4.7ppt to 23.9% year-on-year. 2) The 3Q23 management expense rate/sales expense rate/R&D expense ratio was +1.3/+1.2ppt, respectively, a slight increase, mainly due to the company's increased overseas market development. Under the comprehensive influence of the company's increase in overseas market development, 3Q23 companies' net profit margin was -6.4ppt to 6.5% year-on-year. 3) The cash flow performance of 1-3Q23 operating activities was better than net profit from net profit, and the cash flow was relatively healthy.

Development trends

3Q23 Overseas business performance has clearly reached an inflection point. With the end of downstream inventory removal and the continued expansion of new overseas markets, we estimate that the company's overseas business performance is expected to improve quarterly. In addition, the company is also actively promoting the integration of large models with existing products and ecosystems. Overseas markets have launched conference products in collaboration with Microsoft, and closed testing of major models related to education and corporate services in the domestic market has begun.

Profit forecasting and valuation

Considering that domestic demand for education and enterprises is still weak, we lowered our 2023/2024 profit forecast by 23%/24% to 1,541 billion yuan/1,850 million yuan. The current stock price corresponds to a price-earnings ratio of 20.6 times /17.6 times in 2023/2024. To maintain an outperforming industry rating, we simultaneously lowered our target of 17.4% to 54.5 yuan, corresponding to 24.8 times the 2023 price-earnings ratio and 21.2 times the 2024 price-earnings ratio, which is 20.2% higher than the current stock price.

risks

Market competition increases the risk; the risk of overseas expansion falling short of expectations; the risk of fluctuations in raw material prices.