Key points of investment
Global mobile phone industry: Demand has gradually bottomed out, and AI end-side applications are expected to drive industry recovery. The last round of global mobile phone shipments peaked in 2016. It has been 7 years since then, and the demand for switching is constantly increasing.
According to Canalys data, in the fourth quarter of 2023, the global smartphone market grew 8% year over year to 319.2 million units, showing signs of steady recovery. The application of the big AI model brings a new user experience, which is expected to drive a recovery in global demand for mobile phones. IDC expects global shipments of next-generation AI phones to reach 170 million units in 2024, accounting for about 15% of total smartphone shipments.
Large AI end side models drive the demand for comprehensive mobile phone hardware upgrades. Large end side models require stronger system-level chips (SoC) and storage space, and at the same time place higher demands on cooling efficiency. AI brings a new interactive experience and places higher demands on sound input and output.
The innovative application of AI in optics will drive the penetration rate of high-end optical devices to increase.
Many of the company's businesses are expected to benefit from mobile phone upgrades
The company has a leading edge in the field of high-end microphones and speakers, which can meet the needs of AI acoustics upgrades; the company's optical product structure is continuously optimized, and the gross margin is expected to improve in 2024; the company's cooling products can meet the demand for more efficient cooling of AI phones.
We believe that global demand for mobile phones is gradually being boosted by AI. Relying on continuous improvements in technology and customer structure, the company is expected to achieve revenue and profit growth above the industry average. At the same time, through the merger and acquisition of PSS, the company is expected to quickly open up new growth space in the automotive sector.
Investment advice
We estimate that the company's total revenue for 2024-2026 will be RMB 259.2 (+26.5%), 289.8 (+11.8%), and RMB 327.1 (+12.9%), respectively, and the corresponding net profit to mother will be RMB 15.1 (+45.5%), 18.95 (+25.5%), and 22.9 (+20.8%) billion yuan, respectively.
We believe 2024 will be an inflection point for the company's performance to return to growth. The company's reasonable share price should be HK$30.11 per share, corresponding to 22 times PE in 2024, with room for a 21.2% increase in stock price, giving it a “buy” rating.