Core views

In 2023, due to the impact of overseas macroeconomics and the procurement pace of domestic telecom operators, the company's revenue and profit declined, but the company actively promoted cost reduction and efficiency. The various fee rates are well controlled. In 2024, China Mobile's home gateway procurement volume increased dramatically, and the company's share of all standard packages ranked in the top two. The company's broadband connection is expected to increase in 2024. In 2023, the company's automotive display business received 20 key project targets from core customers, and is expected to continue to expand in the next two years. Furthermore, with the launch of new products such as AI set-top boxes and MR, the company's operations are expected to improve overall.

occurrences

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 of 602 million yuan, a year-on-year decrease of 26.85%, gross margin of 16.75%, and net cash flow from operating activities of 475 million yuan, a year-on-year decrease of 70.49%.

Brief review

1. Affected by the overseas economy and the pace of operators' procurement, the company's performance in 2023 is under pressure.

In 2023, we achieved operating income of 10.627 billion yuan, a year-on-year decrease of 11.50%; realized net profit of 602 million yuan, a year-on-year decrease of 26.85%, gross margin of 16.75%, and net cash flow from operating activities of 475 million yuan, a year-on-year decrease of 70.49%. The 2023 performance is expected to decline. First, the pace of collection of set-top boxes and gateways from domestic operators will slow down; second, overseas shipments will slow down due to European and American inflation, the Russian-Ukrainian war, and exchange rate fluctuations. Overseas sales in 2023 were 4.34 billion yuan, down 15.7% year on year. Among them, sales of set-top boxes and other smart products were 4.15 billion yuan, down 12.6% year on year. Looking at a single quarter, 2023Q4 achieved operating income of 2,999 billion yuan, a year-on-year increase of 0.68%, and achieved net profit of 154 million yuan, an increase of 32.8% year-on-year, ending three consecutive quarters of decline in revenue and profit. This is expected to be related to the year-on-year increase in overseas market shipments.

In terms of costs and expenses, we actively promote cost reduction and efficiency. With the exception of the increase in R&D cost rates, all other cost rates have declined. In 2023, the company's sales, management, finance and R&D expenses rates were 4.84%, 1.68%, -1.27%, and 5.66%, respectively. The year-on-year ratio was -0.19pct, -0.12pct, -0.68pct, and +0.49pct, respectively.

2. In 2024, China's mobile home gateway procurement volume increased dramatically, and the company's share of all standard packages ranked in the top two.

In January 2024, China Mobile announced the centralized procurement of smart home gateway products from 2024 to 2025, with a procurement scale of 759.351 million units, of which 10 GPON reached 35.9336 million units, accounting for 47.3%. The scale of this collection was significantly higher than the previous collection (the previous one was 26.3 million units; actual shipments may be higher than this number). Skyworth Digital ranked in the top two for the share of all packages in this collection. The shares of bid 1 to 4 packages are 18.85% (first), 19.57% (second), 18.85% (first), and 15.94% (second), respectively. The overall bid share is estimated to be about 18.1%. China Mobile's procurement volume increased sharply year on year, and the company's market share increased markedly. The company's broadband connection business is expected to show strong growth momentum in 2024. In addition, in 2023, the company also achieved a certain increase in broadband connectivity business in Southeast Asia, South Asia, Latin America, Europe, etc. With the further promotion and penetration of gigabit broadband in countries and regions around the world in the future, it is expected that the overseas broadband connection business will continue to grow based on the company's accumulated resources and strategic partnerships with overseas operators and channels over many years.

3. Set-top boxes maintain their leading edge, actively develop new products, and create AI set-top boxes.

As a set-top box leader, the company continues to maintain its leading edge in domestic and overseas markets. It performed well in the set-top box collection of the three major domestic telecom operators in 2023, winning the first place bid in Mobile's 2023 centralized smart set-top box product procurement project, with a cumulative share of 28.39%; and won fourth place in the 2023 China Unicom smart set-top box centralized public procurement project. Driven by demand from overseas Europe, Latin America, India, Africa, the Middle East, etc., the overall order can achieve stable supply and delivery, and the market coverage and market share of mainstream overseas telecommunications or integrated operations are steadily increasing. Furthermore, the company actively embraces AIGC and invests resources in research and development of AI applications such as ChatGPT. Currently, Skyworth Digital has implemented many smart functions such as AI content generation, audiovisual content search and recommendation, intelligent Q&A, and IOT applications on set-top boxes. Since different domestic and overseas application scenarios chose to cooperate with different large model manufacturers, as the first batch of domestic cooperative customers, the company pioneered the use of Microsoft Chatgpt and Baidu Wenxin's big model to promote product applications and internal office scenarios based on big model capabilities.

4. The automotive display business grew rapidly, and new AR/MR products were released.

In 2023, the company's automotive intelligence completed the production and sale of more than 1 million sets of products, achieving revenue of 982 million yuan, an increase of 216.29% over the previous year. In 2023, the company obtained 20 key project targets for core customers, added fixed targets for FAW Pentium, Changan Avita, and Geely Galaxy series products, and simultaneously obtained access and project targets from two leading independent OEMs and mainstream domestic car manufacturers. It has laid the foundation for the continued growth of the company's in-vehicle display business.

During CES2024, the company exhibited Skyworth's new MR product PANCAKE 2 for the first time. It uses a monocular 4K micro-OLED screen with 8K resolution. It is also Skyworth's first monocular 4K binocular 8K MR product. The company also released the first AR glasses, the A1, which weighs less than 75g and is equipped with a 1080P high-definition micro-OLED screen, reaching 54PPD resolution, 4496PPI, and 90Hz refresh rate, presenting users with a 172-inch screen equivalent to 6 meters. Before the C-side market exploded, the company continued to deeply cultivate the B-side market and 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. With the release of Apple Vision Pro and the launch of various Wensheng video models, the XR ecosystem continues to be rich, and we believe we are getting closer to the point where the XR industry exploded on the C-side. At that time, with years of deep cultivation in the XR industry, the company is expected to seize the opportunity and achieve sales breakthroughs.

5. Profit forecasts and investment suggestions.

In 2023, due to the impact of overseas macroeconomics and the procurement pace of domestic telecom operators, the company's revenue and profit declined, but the company actively promoted cost reduction and efficiency.

The various fee rates are well controlled. In 2024, China Mobile's home gateway procurement volume increased dramatically, and the company's share of all standard packages ranked in the top two. The company's broadband connection is expected to increase in 2024. In 2023, the company's automotive display business received 20 key project targets from core customers, and is expected to continue to expand in the next two years. Furthermore, with the launch of new products such as AI set-top boxes and MR, the company's operations are expected to improve overall. We expect the company's net profit to be 777, 952, and 1.05 billion yuan in 2024-2026, corresponding PE of 17.9, 14.6, and 12.6X.

6. Risk warning.

Prices of raw materials have risen, prices of products with high import dependency such as switching chips and main control chips; set-top box shipments fall short of expectations, 4K and 8K penetration rates of domestic operators have slowed, competition in overseas markets has intensified, and gross margin has declined; gigabit broadband development falls short of expectations, and new entrants have led to increased market competition; AR/MR and other businesses have high upfront revenue, but it is difficult to ship on the C-side in the short term, affecting the company's net profit; VR business development falls short of expectations, VR display and optical technology development falls short of expectations, new technology application costs are high, content ecology is scarce. The amount fell short of expectations The competitive pattern of VR terminals deteriorated, and gross margin declined; the recovery of consumer electronics fell short of expectations, and the profits of small and medium-sized modules continued to deteriorate.