Incident: In 2023, the company achieved revenue of 10.63 billion yuan, a year-on-year decrease of 11.5%; net profit to mother was 602 million yuan, a year-on-year decrease of 26.85%.

Weak consumer demand suppresses performance, and it has won bids for multiple gateway projects in 24 years. In 2023, the smart terminal business achieved revenue of 7.863 billion yuan, a year-on-year decrease of 17.91%, mainly due to insufficient market demand and falling unit prices. However, the company has maintained its leading position in market share and coverage. Over 23 years, it has won the previous share of the previous share for procurement projects such as set-top boxes, gateways, etc., and the market coverage and market share of mainstream telecom or integrated operations of overseas set-top boxes has been steadily increasing. In 2024, in terms of broadband connectivity, the company has successively won bids for many operator collection projects, including China Telecom Tianyi Gateway 4.0 and Henan Unicom FTTR projects; in terms of set-top boxes, the gradual implementation of AI applications will improve product capabilities, and the iteration of set-top boxes to HD and Ultra HD is expected to drive price growth; we expect the smart terminal business to resume growth in 24.

Automobiles are showing rapid growth, and small to medium modules are expected to reduce losses in 24 years. In '23, the automotive display business achieved revenue of 982 million yuan, an increase of 216.29%; the small to medium size display module business achieved revenue of 1,098 million yuan, a year-on-year decrease of 26.89%. In 23 years, the company's automotive intelligence completed the production and sale of more than 1 million sets of products. In terms of small to medium sized modules, the business's net profit loss in '23 is expected to continue to decrease in 24 years due to organizational restructuring and shift to direct connection with brands.

Commercialized AI application solutions were initially implemented, and overseas sales of XR products expanded. The company has now accumulated algorithm technology such as CV, NLP, speech recognition, AI image quality enhancement, gesture recognition, edge computing, etc., and is actively testing and creating new products that add AIGC capabilities to existing products. It has carried out technical verification on the company's smart OTT boxes, projectors and other products (overseas, retail), and has initially implemented the technical implementation of commercialized AI application solutions. On the XR side, the company's products, mainly the Pancake series, are customized projects for major B-side customers in overseas industries, focusing on expanding application customers and achieving sales in the XR industry such as Japan, the United States, South Korea, India, and Brazil. We believe that new technologies such as AI and XR are expected to contribute to the increase in the smart terminal business.

Gross margin declined year-on-year, and the expense ratio remained stable. In 2023, the company's gross margin reached 16.75%, down 0.9 pct year on year, mainly due to the year-on-year decline in professional display business gross margin; in 2023, professional display business gross margin was 2.28%, a year-on-year decrease of 4.49pct; sales/management/R&D expenses ratio was 4.8%/1.7%/5.7%, a year-on-year change of -0.2/-0.1/0.5pct.

Profit forecast and investment rating: As a leader in the smart terminal industry, the company is expected to benefit from high-definition iteration and AI empowerment. Considering that consumer demand was weak in 23 and is expected to gradually recover in 24, we adjusted the company's net profit from 2024-2025 from 1,08/1.31 billion yuan to 80/950 million yuan, an increase of 34%/18% year on year. The net profit for 2026 is expected to be 1.11 billion yuan, an increase of 17% year on year, maintaining the “buy” rating.

Risk warning: Order delivery falls short of expectations, new technology development falls short of expectations