Key points of investment:

The company released the 2023 annual report and 24Q1 quarterly report: revenue for the full year of 2023 was 4.84 billion yuan, up 12.4% year on year; net profit to mother was 563 million yuan, up 68.8% year on year. 24Q1 revenue was 1.24 billion yuan, up 14.6% year on year, and net profit to mother was 125 million yuan, up 37.4% year on year. The performance was in line with market expectations.

The C-side of cloud services is expected to accelerate. Cloud business revenue in 2023 was $856 million, up 27.8% year over year. Among them, C-side value-added services increased 18% year over year, and B-side developer customer service revenue increased 40% year over year. The B-side PaaS IoT cloud platform has AI and audio and video capabilities as the core, helping thousands of industries to digitalize and intelligently upgrade and achieve rapid growth; while the C-side, with the support of the AI big model, intelligent algorithms have accelerated commercial deployment, and demand for recently released new video call cameras, home assistant robots, etc. is high. It is expected that the C-side payment rate and ARPU value will increase this year.

The gross margin of smart cameras has increased dramatically. Smart camera revenue in 2023 was 2.99 billion yuan, up 3.0% year over year. Benefiting from lean supply chain management and reduced raw material costs, gross margin increased by 7.6pct to 38.6%. The company continues to innovate and iterate, and has released various new smart home camera products such as panorama, binocular, battery, 4G, and pet care. It is expected that the launch of new products and the accelerated penetration of overseas developing markets will give smart cameras momentum for steady growth.

The second curve of smart home entry was successfully cultivated. In 2023, smart household revenue was 506 million yuan, up 49.5% year on year, making it the fastest growing sub-sector of the company. Smart home entry products are in strong demand in domestic and foreign markets, and as high-frequency interactive hardware at the home's physical entrance, it is expected to drive sales of the company's other smart home products.

Intelligent robots integrate AI models with forward-looking layout. The company has deployed C-end cleaning robots, companion robots, and B-end commercial cleaning robots. The company has accelerated breakthroughs in the three core technologies of vision modules, natural language interaction, and actuators; the new home assistant robot RK3 will further integrate large model capabilities to explore the commercialization path of AI agents.

The share of overseas business continues to rise. Overseas revenue in 2023 was 1.51 billion yuan, up 24.8% year on year. The growth rate was significantly higher than domestic revenue, accounting for more than 30%. The company introduces diversified, high-value products for developed countries, cost-effective products for developing countries, and continues to increase the penetration rate of cameras. It is expected that the share of overseas revenue will continue to increase.

Actively invest in channel expansion and new product development. Sales/R&D expenses increased by 28.4%/21.2% respectively in 2023, and continued to maintain a relatively rapid growth rate in 24Q1. Considering that the company continues to invest heavily in domestic and international channels and brand building and R&D iterations of new products, sales and R&D expenses are expected to rise slightly in 2024.

Investment analysis: Considering that the company will increase investment in sales and R&D, we slightly revised the 2024-2025 net profit forecast to RMB 706/898 million (the original forecast value was RMB 718/965 million yuan) and added the 2026 net profit forecast of RMB 1.05 billion, corresponding to PE of 37/29/24 times for 24-26, respectively, maintaining the “buy” rating.

Risk warning: Competition in the smart home industry is intensifying; the pace of commercialization of AI algorithm packages on cloud platforms is lower than expected; overseas business development falls short of expectations.