Revenue for the first three quarters increased by 3.12% year on year, and net profit was reduced by 24.75% year on year. The company released three quarterly reports, with operating income of 5.069 billion yuan (YoY 3.12%), net profit of 191 million yuan (YoY -24.75%), net profit of 191 million yuan (YoY -24.75%), net profit of 222 million yuan (YoY -13.64%); of these, 3Q23 operating income of 1,770 billion yuan (YoY 1.15%, QoQ 5.94%), net profit of 30 million yuan (YoY -122.93%, QoQ -139.43%), including investment income (excluding foreign exchange loss) - The impact of 50 million yuan and foreign exchange losses of 26 million yuan, after deducting non-attributable net profit of $44 million (YoY -132.11%, QoQ -134.37%).

The gross margin for the first three quarters increased by 1.99pct year-on-year, and the expense ratio for the period increased. The company's gross profit margin for the first three quarters was 29.49% (YoY 1.99pct), of which the 3Q23 gross profit margin was 28.80% (YoY -0.42pct, QoQ1.17pct). Although gross margin increased in the first three quarters, revenue growth fell short of expectations due to domestic and foreign market demand falling short of expectations, especially the downgrade in high-end market demand and extended project confirmation cycles. At the same time, the company's sales expense ratio for the first three quarters was 13.72% (YoY 1.78pct) and R&D expenses were 5.52% (YoY 0.77pct), maintaining strategic investment in marketing and R&D, leading to a decline in net interest rate.

Mini/Micro LED capabilities have improved, and the field of virtual XR shooting and international competitions continues to excel. In June 2023, the company's Mini/Micro full-scenario product was released. The point spacing covered P0.3-P4.0, and the self-developed solid crystal mixing algorithm increased the solid crystal efficiency by more than 50%, and the comprehensive product yield reached more than 98%. The company's XR virtual shooting solution helped iQiyi Hengdian virtual studio to produce China's first reality+film and television virtual drama “Feathers of Clouds”, increasing shooting efficiency by more than 30%. The company helped the Asian Games, provided a total of 1,500 square meters of LED displays and integrated solutions for the seven core smart stadiums, and continued to excel in the field of international events.

LED is combined with AI, and Zhouming Digital People is building a new digital economy ecosystem. The company and many domestic AI leaders have made breakthroughs in the field of model application, becoming the first company in the industry to obtain an official GPT-4 access license. The company has obtained global ISV universal certification for Dell workstations, further expanding its global influence. The company connects cutting-edge technologies such as AI and XR with supply chain systems to comprehensively enhance integrated software and hardware solutions and delivery capabilities. As a new type of digital employee, Zhouming Digital People is widely used in offline stores to help the digital economy ecosystem.

The 2023 Restricted Stock Incentive Plan was released, and incentives were granted to 434 people for the first time. On August 11, the company announced the 2023 restricted stock incentive plan. It plans to grant incentives to 22 million restricted shares, accounting for about 2.01% of the total share capital; of these, 1995 million shares were granted for the first time, involving 434 people, with a grant price of 4.04 yuan/share and 6.06 yuan/share. The first grant date is October 25, 2023.

Investment advice: We are optimistic about the growth brought about by the market recovery and economic recovery and the release of display demand, and that applications such as XR virtual photography, naked eye 3D, and digital virtual people will provide sufficient momentum for the company. The company's net profit from 2023-2025 is expected to increase 389.0%/29.8%/28.6% year-on-year respectively to 3.11/4.04/519 million yuan, corresponding to PE 22.7/17.5/13.6 times, maintaining the “buy” rating.

Risk warning: Demand falls short of expectations, risk of impairment of goodwill, risk of exchange rate fluctuations, and increased market competition.