Key points of investment
The global mobile phone industry is gradually bottoming out, and the Q4 of 2023 is showing positive growth for the first time. Due to slow smartphone technology innovation in the past few years and insufficient consumer demand for switching, the switching cycle has been extended from 2 years to more than 3 years. Now, more than 7 years have passed since the peak of shipments in 2016. Back then, the model aging phenomenon was getting worse, and the demand for replacement was constantly increasing. According to Canalys data, the decline in global smartphone shipments continued to narrow in the first 3 quarters of 2023, and increased 8% year over year in the fourth quarter, showing a strong sign of steady recovery. Shipments for the full year of 2023 were 1.14 billion units, and the decline narrowed to 4%.
AI may have a revolutionary impact on mobile phone interaction, thereby driving industry growth. As the application of AI models on the terminal side gradually increases and matures, AI will have a revolutionary impact on the interaction mode of mobile phones, thus creating a new market. The Galaxy S24 series launched by Samsung Electronics, is equipped with AI technology that brings users innovative functional experiences such as real-time call translation and instant search, and has been well received by the market. Samsung has raised the Galaxy S24 sales target from 12 million units to 13 million units in the first quarter of 2024. Other mainstream mobile phone manufacturers around the world, including Apple, Huawei, Honor, Xiaomi, OPPO, and Vivo, have deployed large models of end-side AI. Canalys anticipates that 5% of smartphone shipments will be AI phones by 2024, and this share will rise to 45% by 2027.
The company focuses on developing high-end optical modules, with high revenue flexibility
The company's mobile phone camera module shipments in 2023 were 167 million H1 units, down 20.8% year on year; H2 in 2023 was 199 million units, down 3.2% year on year. The decline was significantly narrower than in the first half of the year, while the year-on-month increase was 19.1%. Mobile camera modules with 32 megapixel and above accounted for 37.1% of H1 deliveries in 2023, and 47% and 49% of high-end modules in January and February 2024, continuing the overall upward trend.
Investment advice
We forecast that the company's revenue for 2023-2025 will be 124.57 (-9.5%), 141.66 (+13.7%), and 165.64 (+16.9%) billion yuan, respectively, and the corresponding net profit of the company will be 1.01 (-41%), 2.73 (+170.2%) and 4.24 (+55.4%) billion yuan, respectively. We believe that 2024 will be an inflection point for the company's performance to return to growth. The valuation is reasonable based on 15 times PE in 2024. The corresponding target share price is HK$3.76 per share, and there is room for a 20% increase in the stock price, giving it a “buy” rating.