3Q23 performance is lower than we expected.

Liad announced 3Q23 results: operating income of 2.005 billion yuan, down 3% from the same period last year, and net profit of 123 million yuan, down 25% from the same period last year, lower than we expected. We believe that the main reasons for the pressure on the performance of Liad 3Q23 are: 1) the lower-than-expected market orders and development progress of the domestic LED channel, which is a drag on the company's revenue and performance; and 2) the slow progress in the recovery of night tours, resulting in pressure on growth in related areas.

Trend of development

Smart display business is developing steadily and Micro LED is progressing smoothly. According to the company's announcement, in the first three quarters of 2023, the smart display business achieved operating income of 4.976 billion yuan, of which domestic direct sales reached 2.264 billion yuan, an increase of 27% over the same period last year, while Asia, Africa and Latin America achieved 446 million yuan, an increase of 48% over the same period last year. We believe that the growth of domestic direct sales in Liad is mainly due to the recovery of demand after the epidemic and the investment of some deferred projects affected by the epidemic. Asia, Africa and Latin America have gradually entered the harvest period due to the investment of the company's personnel and team in 2H22. In addition, according to the announcement, 1-3Q23 Liad Micro LED newly signed an order of 457 million yuan, achieving a business income of 345 million yuan. We are optimistic that the company's Micro LED will continue to grow at a high speed and introduce into the middle and high-end market by virtue of product upgrades. In the medium to long term, we think that Micro LED may become one of the mainstream display solutions in the future.

Virtual reality products continue to upgrade, downstream customers have a high degree of recognition. Virtual Motion Point, a wholly owned subsidiary of Liad, has the world's leading motion capture technology. 3Q23 Virtual Motion Point has released Motive 3.1 Beta version. According to the company announcement, Motive is the official supporting software of OptiTrack, which can transfer real-time data to character bones, help users to track tags accurately, process bone data quickly, and realize real-time drivers of real people and allowing you to admit defeat. Motive 3.1 has been optimized and updated again based on its original performance, maximizing camera compatibility, upgrading industry-leading functions such as IMU sensor fusion and continuous calibration, while adding quadruped / soft motion capture and camera reset functions to provide better services for a variety of industries with technological innovations. We expect that the software upgrade will help OptiTrack achieve better virtual action interaction and optimize the user experience. In addition, our good-looking virtual moving point OptiTrack products are expected to focus on core technologies such as "spatial computing", "digital human" and "AI model" under the blessing of AI in the future, continuously empowering terminal application customers.

Profit forecast and valuation

Due to the lower-than-expected recovery of LED channel and cultural travel night tour business, we downgrade Liad 2023max 24e EPS 10max by 12% to 0.30max 0.37 yuan, the current share price corresponds to 2023/24e20.4/16.2x Pmax E. We maintain our outperforming industry rating, taking into account the expectations of the market pressure on Liad's performance and a slowdown in channel recovery, we maintain our target price of 7.50 yuan, corresponding to 2023x24e 25.1/20.0xP/E, with 23% room for increase.

Risk

Downstream LED demand recovery is not as expected; virtual moving point customer development progress is not as expected.