Incident: The company released its 2023 annual report. In 2023, it achieved operating income of 10.627 billion yuan, a year-on-year decrease of 11.50%; realized net profit to mother of 602 million yuan, a year-on-year decrease of 26.85%; and realized deducted non-net profit of 558 million yuan, a year-on-year decrease of 24.44%.

The gross margin of smart terminals is steady, and product unit price recovery can be expected in 2024. In 2023, the company's smart terminal revenue fell 17.91% year on year. Among them: (1) the broadband business growth trend was remarkable, benefiting from the “14th Five-Year Plan” and the domestic gigabit broadband network upgrade, the company's PON gateway market share increased markedly; (2) set-top boxes were affected by the year-on-year decline in sales unit prices and insufficient consumer demand in the market, and growth was pressured. The gross margin of smart terminals increased 0.99 percentage points year-on-year in 2023. We believe that the company relied on the Group's large-scale advantage to achieve strong supply chain integration capabilities. The company took the lead in integrating Chatgpt and Wenxin's big model to promote product applications and the company's internal office scenarios. As the application of AIGC functions continues to penetrate smart boxes, the unit price of the product is expected to be repaired in 2024, and gross margin is expected to continue to increase.

Vehicle displays are expanding smoothly, and the small to medium display module business is expected to be optimized. In 2023, the company sold more than 1 million units of cars intelligently, achieved revenue of 982 million yuan, an increase of 216.29% over the previous year, obtained 20 key project targets from core customers, and added new targets for FAW Pentium, Changan Avita, and Geely Galaxy series products. In 2023, the display module business was affected by the downturn in the foreign economy and weak overall mobile phone market sales, and achieved operating revenue of 1,098 billion yuan, a year-on-year decrease of 26.89%. The company actively optimized the organizational structure, switched to directly connecting with brands, and expanded into other display business fields such as drones/POS machines/robots. The business is expected to be optimized in 2024.

The Pancake2 MR all-in-one is benchmarking Vision Pro, leading the era of spatial computing. The company is currently promoting the development of 6DOF MR all-in-one computers and the development of MR all-in-one operating systems and terminal platforms. In January 2024, the company's new product, Pancake2 MR, was unveiled at CES in the US. The product uses two 16 megapixel RGB cameras, a micro-OLED screen, and has 4K resolution, and has VST and other capabilities. Compared with Apple's new VisionPro, the company's XR also opens the era of spatial computing. In 2023, the company's Pancake series was a customized project for major overseas B-side customers, focusing on expanding application customers and achieving sales in the XR industry in Japan, the United States, South Korea, India, Brazil, etc., and is expected to further advance to the C-side in 2024.

Investment advice: The company's main set-top box business is affected by macroeconomic factors, and the 2023 performance is under pressure. In the future, as overseas customers continue to expand, and AI technology integration and empowerment, it is expected to drive a new round of growth for the company. We predict that in 2024-2026, the company will achieve revenue of 129.56 billion, 154.17, and 18.369 billion yuan, and net profit to mother of 8.55, 10.68, and 1,360 billion yuan. Corresponding to current PE valuations, it is 15x, 12x, and 9x, respectively, maintaining an “increase in holdings” rating.

Risk warning: the risk that the operator's collection volume falls short of expectations; the risk of large fluctuations in raw material prices; the risk of new business promotion falling short of expectations.