LED display control leader, outstanding performance highlights strong alpha. Established in 2008, Nova Nebula has been deeply involved in products related to screen control systems for decades. It has now formed three major business matrices: LED display control systems, video processing systems, and cloud-based information publishing and management systems. The downstream application scenarios are rich, covering various fields such as advertising media, stage interpretation, and virtual studios. With 2023Q1-Q3, the company achieved revenue of 2.1 billion yuan, an increase of 40% over the previous year; net profit without deduction of 400 million yuan, a year-on-year growth rate of 89%. We believe that with the increase in the penetration of small-pitch LEDs and the acceleration of overseas market expansion process, the company's performance will continue to grow.
Display control system: small-pitch LED penetration is increasing, and the downstream economy is gradually recovering. The company's LED display control system is the core component of LED displays, mainly composed of sending cards and receiving cards. We believe that the company's business has three major driving forces: 1) The price of small-pitch screens is gradually declining, and 5G+8K drives the development of the industry. According to Lotu Technology data, the average price of small-pitch LED screens in mainland China in 23Q3 was 14,000 yuan/square meter, down 5.3% from month to month. The decline in cost drove LED products from the high-end market to sink, bringing about incremental demand. In addition, 5G+8K technology drives new product iterations and can also stimulate demand in emerging markets.
2) The number of pixels per unit area increases, and the value of the control system increases. Currently, the average point spacing of LED displays is growing to 1.5mm, and the number of pixels per square meter will reach more than 400,000. Higher requirements are placed on display control systems, and their value is also increasing. 3) Downstream inventory removal, industry boom recovery. Take the inventory situation of the company's three major customers as an example. The inflection point became apparent in 23Q2, and they began to actively prepare goods to cope with the increase in demand.
Furthermore, the company's overseas revenue in this business increased 90% year-on-year in '22, and gross margin was as high as 71%, which is expected to be an important driving force for future performance growth.
Video processing equipment: 5G+8K drives development, and the volume of products is worth looking forward to. On the industry side, video is now gradually developing in the direction of 8K and AR/VR. A number of policies strongly support the ultra-high-definition video industry. The popularity of 5G has also made it possible to achieve high bandwidth and low latency, helping the scale of the industry continue to grow, and video processing equipment is expected to follow the volume. On the company side, we have seen that the gross margin of its video processing system business has been higher than 56% for three consecutive years, showing a trend of increasing year by year, showing strong bargaining power. In addition, the company raised 210 million yuan to lay out the LED display control and video processing field, in line with the industry's development direction, and actively promote ongoing research projects. It is expected that the company's profitability will be further enhanced in the future.
Profit forecast and investment advice: We expect the company to achieve operating income of 31.1/43.0/ 5.74 billion yuan in 2023/2024/2025, an increase of 43.0%/38.4%/33.5% year-on-year, and achieve net profit to mother of 6.02/9.06/1.290 billion yuan, an increase of 95.4%/50.5%/42.4% year-on-year. As an industry leader, Nova Nebula has a first-mover advantage in technology. Product quality has reached world-class levels, and the share of overseas revenue is increasing year by year. At the same time, with the recovery of H2 LED downstream in 2023, we believe the company will further benefit during the recovery period of the industry. First coverage, giving a “Highly Recommended” rating.
Risk warning: demand recovery falls short of expectations; overseas progress falls short of expectations; R&D falls short of expectations.