2023 results fall short of our expectations

The company announced 2023 results: 1) Revenue of 10.627 billion yuan, -11.5% YoY; net profit to mother of 602 million yuan, -26.8% YoY. It is proposed to pay a cash dividend of 1.5 yuan for every 10 shares, with a cash dividend ratio of 28.4%. 2) Corresponding to 4Q23 revenue of 2,999 million yuan, +0.7% YoY; net profit to mother was 154 million yuan, +32.8% YoY.

3) The company's performance fell short of our expectations, mainly due to pressure on the smart terminal business demand.

Weak demand dragged down, and the volume and price of smart terminals declined, but the market share did not decrease: 1) The company's smart terminals were mainly in the set-top box business. In 2023, they were dragged down by weak market demand. Prices and sales of related products all declined year on year, but the decline in the second half of the year began to narrow month-on-month. 1H23/2H23 smart terminal revenue -28%/-6% YoY. 2) The company's traditional business still maintains strong competitiveness. In terms of set-top boxes, in 2023, the company won first place in China Mobile's centralized procurement project for smart set-top box products, with a cumulative share of 28.39%; China Unicom's centralized public procurement project for smart set-top boxes won fourth place. In terms of broadband, it won the bid with an 11% share in the Telecom Group broadband integrated terminal procurement project in March 2023, and ranked first in the winning bid share in the second batch of centralized procurement projects for China Mobile smart home gateway products from 2022 to 2023.

The automotive electronics business is growing rapidly, and XR is actively expanding overseas: 1) According to the company's annual report, the company's automotive intelligence business revenue in 2023 was 983 million yuan, +216% over the same period, with sales exceeding 1 million units, receiving 20 key project targets for core customers, and adding new targets for FAW Pentium, Changan Avita, and Geely Galaxy series. 2) The XR business is still dominated by the Pancake series, focusing on customized projects for overseas Big B customers. It has achieved breakthroughs in markets such as Japan, the United States, South Korea, Brazil, etc., and added Indian customers in 2023. 3) The operating services business generated revenue of 324 million yuan in 2023, +37.7% year-on-year.

Financial analysis: 1) The gross profit margin in 2023 was 16.7%, -0.9ppt year on year; mainly due to the marked decline in the gross margin of LCD devices, smart TVs and all-in-one computers in professional displays, which was hampered by the marked decline. 2) The company strictly controls the cost rate. In 2023, the management fee rate and sales expense ratio were 1.7%/4.8%, year-on-year, -0.1pp/ -0.2ppt; continuous investment in R&D in new business, R&D expenses rate was 5.7%, +0.5ppt year over year.

Development trends

Looking ahead to 2024, in terms of traditional business, the company plans to actively expand new categories of operators and lay out and operate government business; AI and smart terminal applications are still the direction of iterative upgrading of the company's MR products, and the company plans to expand new overseas application customers in B-side education, training, medical care, etc.

Profit forecasting and valuation

Considering that demand for smart terminals recovered later than expected, we lowered our 2024 profit forecast by 25% to 680 million yuan and introduced a profit forecast of 758 million yuan for 2025. The current stock price corresponds to 2024/2025 20.4x/18.4xP/E. Maintaining an outperforming industry rating, we lowered our target price by 9% to 15.5 yuan based on profit cuts and recent valuation revisions, corresponding to 2024/2025 26.2x/23.5x P/E, with 28% upside.

risks

Risk of new business development falling short of expectations; risk of market demand fluctuation; increased risk of market competition.