Incident: The company's revenue in '23 was 31,681 billion yuan, down 4.6% year on year; gross margin fell 5.4 pct year on year to 14.5% year on year; net profit to mother fell 53.5% year on year to 1,099 billion yuan, which is in line with the lower limit of the profit warning range of RMB 1,084 to RMB 1,204 billion, in line with market expectations. Net profit due to weak demand for smartphones and downsizing of optical specifications led to a decline in mobile phone lenses, mobile phone camera module shipments, ASP, and gross margin.
Demand for Android phones was weak in 2023, and mobile phone optical profitability declined significantly: against the backdrop of weak demand for Android phones in '23, mobile phone camera module shipments fell 1.8% yoy/increased 9.8% year over year, respectively, fell 10% yoy/remained flat or slightly higher than year on year. The performance was differentiated. The analysis was due to: 1) Customer A's 2H23 mobile phone lens delivery contributed to the growth of mobile lenses; 2) Mobile phone camera modules received orders for more mid-range and low-end products. In terms of profitability, due to: 1) the decline in ASP due to the decline in product specifications of mobile phone camera modules; 2) there is still room for improvement in mobile phone lens yield for customers A, and the gross margin of mobile phone lenses and mobile phone camera modules dropped sharply to about 15% year-on-year in '23, or significantly less than 5%.
Focus on product specification upgrades in '24 and whether there are opportunities to improve profitability beyond expectations: According to IDC data, global smartphone shipments are expected to rise 2.8% year on year in '24, and mobile phone demand ushered in a weak recovery.
The company indicated that mobile phone lens/mobile phone camera module shipments increased 5% year-on-year respectively in 24 years. We analyzed that mobile phone lens growth mainly came from A customer projects and increased share; mobile phone camera modules strategically reduced some middle- and low-end projects, so shipments were expected to be lower than the growth rate of the mobile phone market. In terms of profitability, given that 24:1) mobile phone optical specifications are expected to be upgraded again; 2) product structure optimization; 3) the competitive pattern in the high-end market industry tends to ease, we expect the profitability of mobile phone lenses and mobile phone camera modules to pick up. The company aims to reach 20%/5% gross margin of mobile phone lenses and mobile phone camera modules for the whole of 24 years.
Vehicle lens shipments continued to grow steadily year on year in '23, and the growth rate declined in '24: due to: 1) the year-on-year increase in sales of new energy vehicles led to a rise in demand for automotive lenses; 2) shortages of key components were basically mitigated, and vehicle lens shipments increased 15.1% year on year in '23. The company indicated a 10% year-on-year increase in vehicle lens shipments for the full year of '24, and the growth rate declined. The analysis showed a slowdown due to the growth rate of NEV sales and the progress of electrification by overseas car manufacturers. We expect the ASP and gross margin of automotive lenses to remain stable in '24.
The new automotive business is growing rapidly, the VR/AR business is slowing down in stages, and the medium- to long-term growth logic is still smooth:
Revenue from automobile-related products increased 29% year on year in '23, and the share of revenue increased to 17%. New automotive businesses such as automotive modules, lidar, HUD, and smart headlights/small lights entered the expansion stage. In terms of VR/AR, revenue from VR/AR related products fell 9% year on year in '23, accounting for 3% of revenue. According to the analysis, due to the 2H23 major customer MetaQuest 3 headphone shipments falling short of expectations, the company guided a 15% year-on-year increase in revenue for VR/AR related products in '24. Considering: 1) the potential entry into the MR product supply chain for AA customers; 2) In the long run, the value share of XR optics continues to increase, and the company also has the ability to integrate XR machines. We expect the new automotive business and VR/AR to continue to grow, and the company's medium- to long-term growth logic is smooth.
Profit forecast, valuation and rating: According to the 2023 performance report disclosed by the company, net profit to the mother in '23 was RMB 1,099 million. As the profitability of mobile phone camera modules declined more than expected, we lowered our net profit forecast by 25%/28% to RMB 14.78/RMB 1,850 million for 24/25, respectively, and the net profit forecast for the additional 26 years to RMB 2.171 billion. Demand for mobile phones slowly recovered in '24 and optical specifications were upgraded and restarted, and the company's performance is expected to bottom up and maintain a “buy” rating.
Risk warning: Competition in the lens industry is intensifying; the volume of automotive and VR/AR products falls short of expectations.