The Q3 school season drove revenue growth month-on-month, and panel price increases compounded education hardware competition, putting pressure on profits year-on-year

3Q23 revenue was 7.046 billion yuan (YoY: -0.3%; QoQ: 53.8%), and net profit to mother 0.459 billion yuan (YoY: -49.9%; QoQ: 44.2%). Q3 The traditional peak season for starting school led to a sharp month-on-month recovery in revenue/profit, but net profit declined year-on-year. The main reasons were: 1) rising panel prices brought pressure on the cost side; 2) competition in the price of complete education machines was intense. Although shipments increased, prices were under pressure. Looking ahead to Q4, 1) the price increase of large panels is slowing down, and the cost side may stabilize; 2) overseas inventories are healthy and orders are recovering; 3) the added value of hardware is expected to increase with the launch of the Shivo Education AI model.

Looking forward to the future, I am optimistic about the company's new business prospects such as LED displays/computing equipment/power electronics/robots.

The company's EPS for 23-25 is estimated to be 2.25/2.58/3.42 yuan. Referring to the median PE of comparable companies, the company is given 25x PE in 24 years, and the target price is 65 yuan (previous value: 82 yuan), maintaining the purchase rating.

The increase in panel prices increased pressure on the cost side, and cost reduction and efficiency increased the 3Q23 period to improve the 3Q23 company's gross margin -4.7pct/month-on-month -3.8pct to 23.9%, and the net profit margin was -6.3 pct/month-on-month +0.0pct to 6.9% year-on-month. The main reasons for the year-on-year decline in the company's profit margin include: 1) Increased pressure on the cost side due to the rise in the price of large panels. According to Omdia, the average price in the LCD TV panel industry began to rise after reaching its bottom in September '22, with a cumulative increase of 58.3% in September '23. 2) In the traditional peak season of Q3, market competition is fierce, and shipping prices are under pressure. The company's expense ratio during the Q3 period was +2.6 pct/month-on-month -5.2 pct to 16.2%, of which the sales/management/R&D expenses ratio was +0.4 pct/+1.3 pct/+1.2pct to 6.3%/4.8%/5.7% year over year. The company continued to promote cost reduction and efficiency, and Q3 cost control was good. Additionally, interest income increased in Q3, and the financial expense ratio was -0.3pct to -0.7% year over year.

The AI model empowers comprehensive education/conference software and hardware solutions. Overseas business is gradually recovering by business. Looking at education, we see: 1) Although there is price competition in the market, the company's product shipments have increased, and its position in the industry has been consolidated. 2) The company launched the Sivo eye protection learning tablet V1Pro, gradually expanded the upper education segment, and launched the Sivo Education Model. The added value of hardware is expected to increase. In the field of enterprise services, 1) the company is deeply involved in the Belt and Road countries and actively explores new markets; 2) MAXHUB is leading the opening of closed beta models, and AI value-added services have expanded from education to conference scenarios. In terms of overseas business, major customers gradually recovered their inventory in overseas channels. New orders were added from customers in June-July, and they are optimistic about Q4 overseas business growth opportunities. In the new business area, the Q3 computing equipment/power electronics business grew positively year on year, and we are optimistic that cutting-edge investment will bring medium- to long-term business opportunities.

Give a target price of 65 yuan to maintain a “buy” rating

Considering that increased competition for education hardware is putting pressure on prices, the company's revenue assumptions were lowered, and considering the increase in expenses brought about by overseas market development, the net profit forecast for 23-25 was adjusted to 1.58/1.81/2.4 billion yuan (previous value: 2.13/2.69/3.33 billion yuan). Considering the long-term growth brought about by new businesses such as computing equipment/power electronics, the company was given 25 x PE in 24 years (Wind agreed to expect a median PE of 22.7x), adjusted the target price to 65 yuan (previous value: 82 yuan), and maintained a “buy” rating.

Risk warning: The development of new products is slower than market expectations, and competition in markets such as interactive tablets is intensifying.