Event: The company released its report for the third quarter of 2023. In the first three quarters of 23 years, the company achieved revenue of 5.069 billion yuan, an increase of 3.12% over the previous year; realized net profit of 191 million yuan, a year-on-year decrease of 24.75%; and realized net profit of 222 million yuan, a year-on-year decrease of 13.64%. On a quarterly basis, Q3 achieved revenue of 1,770 billion yuan, a year-on-year increase of 1.15%, a year-on-month increase of 5.94%; realized net profit of -30 million yuan, a year-on-year decrease of 122.93%, a year-on-year decrease of 139.43%; and realized non-net profit of -44 million yuan, a year-on-year decrease of 132.11% and a year-on-month decrease of 134.37%.

Poor demand dragged down overall performance, and the cost side maintained strategic investment: the company's gross margin for the first three quarters of 23 years was 29.49%, +2.00pcts; net profit margin was 3.59%, year-on-year -1.49pcts. Q3 gross margin was 28.80%, -0.42pcts y-o-y, +1.17pcts month-on-month; net margin was -1.83%, -9.20pcts yoy, -6.11pcts month-on-month. While gross margin increased, the company's net profit margin still declined year-on-year in the first three quarters of 23 years. The main reasons were: 1) domestic and foreign market demand fell short of expectations, especially problems such as downgraded demand in high-end markets and extended project confirmation cycles, which caused revenue growth to fall short of expectations; 2) In order to ensure that the company's sales service system was leading and the technical layout was advanced, the company maintained strategic investment in sales expenses and R&D expenses. The company's sales, management, R&D, and financial expenses in the first three quarters were 13.72%/4.47%/5.52%/-0.57% respectively, with year-on-year changes of +1.78/-0.60/+0.77/+0.95pcts, respectively.

COB technology enhances product advantages, and XR commercial applications strengthen industry position: In June 2023, the company's Mini/Micro full-scenario product was released. The COB full form can already meet the requirements of full-scenario applications. The point spacing covers P0.3-P4.0, the solid crystal efficiency has increased by more than 50%, and the comprehensive product yield has reached more than 98%.

In terms of Mini/Micro LED product layout: Zhouming's UMini series products P0.4, P0.6, P0.7, P0.9, P1.1, P1.2, P1.5, and P1.8 have achieved mass production on a large scale, cost has a competitive advantage, and UMini has formed mass sales; P0.4 Micro products have been officially released and have mass production capacity. At the same time, the company's XR virtual shooting solution helped iQiyi Hengdian virtual production studio to produce China's first reality+film and television virtual drama “Feathers of Clouds”, increasing shooting efficiency by more than 30%. “LED+XR” has greatly improved shooting efficiency and led the current trend in film and television production. The company's technology and market share in this field have maintained a leading position in the world.

Promote LED+AI technology innovation and join hands with Dell to build a new bright display ecosystem: The company continues to make efforts in the field of AI applications, has made breakthroughs with many leading domestic AI companies in the field of model application, and has become the first company in the industry to obtain an official GPT-4 access license. At the same time, with its outstanding R&D capabilities, the company successfully obtained global ISV certification for Dell workstations. After passing this certification, the company's products can provide excellent performance and a stable operating experience in Dell's high-standard hardware environment, which will further expand the company's influence on a global scale. In professional hardware cooperation with Dell, Zhouming Digital will join hands with many leading enterprises in the industry to be widely used in offline stores as a new type of digital employee to form a comprehensive, efficient and reliable digital ecosystem. The company will continue to commit to the technological innovation and development of “LED+AI”, join hands with global ecological partners to jointly develop common markets and business opportunities, and jointly promote industry progress and industrial upgrading.

Lower the profit forecast and maintain the “increase in holdings” rating: As domestic display demand gradually picks up, the company is expected to benefit from increased demand for Mini/Micro LEDs and the continued enrichment of emerging application scenarios, enhancing profitability and position in the industry chain. Considering that the recovery of the LED industry in the first half of the year fell short of expectations, while the company maintained strategic investment in sales expenses and R&D expenses, the company lowered its profit expectations. The company's net profit from 2023-2025 is estimated to be 291 million yuan, 399 million yuan, and 502 million yuan respectively, EPS is 0.27 yuan, 0.36 yuan, and 0.46 yuan, and PE is 26X, 19X, and 15X respectively.

Risk warning: Market demand falls short of expectations, risk of technological innovation, risk of exchange rate fluctuations, risk of market competition.