Net profit to mother is expected to increase by 105.46% to 167.09% year-on-year in 2023. The company released the 2023 performance forecast. In 2023, it is expected to achieve net profit of 131-170 million yuan (YoY 105.46%-167.09%), and is expected to achieve net profit of 149-193 million yuan (YoY 178.44%-261.98%); of these, 4Q23 is expected to have a median net profit of 406.687 million yuan (78.62% year-on-year loss, 34.52% month-on-month loss), and the median net profit of net profit without return to mother is estimated to be 5119.75 million yuan (year-on-year loss reduction) 74.87%, or 15.53% month-on-month loss). Furthermore, the company's revenue is expected to increase slightly year over year, and gross margin is expected to improve year by year.

The improvement in the company's gross margin mainly benefits from increased product added value and overseas business contributions. Based on LED ultra-high-definition displays and smart lighting, the company integrates “hardware+system+software+content+interaction” and develops “hardware+system+content+interaction” into an integrated optical display solution, from single hardware to overall solution sales, and the added value of the business gradually becomes prominent. Furthermore, thanks to years of continuous cultivation in the international market, advance channel layout and brand advantages, the company's overseas business contribution continues to grow.

With the advent of the Mini/Micro LED era, the company's Mini/Micro LED capabilities continue to improve. The company continues to lead the development of the industry in LED display technology, continues to lay out on COB and MIP technology routes, and continues to launch a series of advanced technologies and products, including COB, MIP, AM drivers, dynamic pixels, etc. In June 2023, the company's Mini/Micro full-scene product was released. The point spacing covered P0.3-P4.0. The self-developed solid crystal mixing algorithm increased the crystal fixing efficiency by more than 50%, and the comprehensive product yield reached more than 98%.

AI empowers the LED industry and helps companies digitize their light displays. Based on multi-display terminals, the company opens up innovative applications for AI virtual digital humans. Using AI to accelerate spatial computation, motion tracking, full-view 3D, and other software systems adapted to the company's new applications and new businesses, a full-link digital production and broadcasting solution of “LED hardware+digital assets+virtual system+motion catch+AI” was created, forming an ecological closed loop within the vertical field. At the same time, the company independently develops vertical models based on traditional, open source, and commercial models to effectively solve interaction problems in various application scenarios, thus bringing customers AI application implementation solutions integrating display hardware.

Investment advice: Adjust performance expectations and maintain a “buy” rating. Considering that demand for LED terminals at home and abroad remains strong and resilient, the company's overall business quality has been steadily improving. At the same time, applications such as XR virtual shooting, naked eye 3D, and virtual digital people have provided sufficient momentum for the company's development. Since the company's net profit level is still greatly affected by factors such as impairment losses, especially asset impairment losses and credit impairment losses, we adjusted the company's performance expectations. Operating revenue is expected to increase 3.6%/9.2%/13.2% year-on-year to 73.31/80.09/9.065 billion yuan (unadjusted) in 2023-2025, respectively, and net profit to mother increased by 137.2%/132.1%/28.6% year on year to 1.51/3.50 billion yuan (previous value: 3.11/4.04/519 billion yuan), respectively. The current stock price corresponds to PE at 38.1/16.4/12.8, respectively, maintaining a “buy” rating.

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