Event: ArcSoft released its 2023 Annual Report and 2024 Quarterly Report. In 2023, the company achieved operating income of 670 million yuan, a year-on-year increase of 26.07%; achieved net profit of 88.49 million yuan, an increase of 53.03% over the previous year; realized net profit without deduction of 68.07 million yuan, an increase of 898.87% over the previous year. In 2024Q1, the company achieved operating income of 184 million yuan, an increase of 1.84% year on year; realized net profit of 34.17 million yuan, an increase of 21.21% year on year; realized net profit deducted from mother of 30.28 million yuan, an increase of 23.91% year on year.

Comment:

Profit margins continue to rise. The company's net interest rates for 2023 and 2024Q1 were 13.17% and 18.56%, respectively, up 2.44 and 1.14pct year-on-year. The main reasons for the increase in profit margins are: 1) the share of software revenue in the vehicle-side business increased by 1.86/0.43 pct, respectively; 2) the increase in interest income led to a significant decrease in financial expenses. The company's operating cash flow improved dramatically in 2023. The net cash flow from operating activities was 256 million yuan, an increase of 472.55% over the previous year, mainly due to the resumption of mobile phone and vehicle business and a sharp increase in sales repayments.

TurboFusion mass production and shipment led to a steady recovery in the mobile phone business. In 2023, the company's mobile smart terminal vision solutions achieved revenue of 581 million yuan, an increase of 22.82%; in 1Q24, the business achieved revenue of 161 million yuan, an increase of 8.91% over the previous year, in line with expectations. On the industry side, according to Canalys, global smartphone shipments increased 11% year-on-year in 1Q24, of which non-Apple's share was about 84%. Global economic recovery and rising consumer demand led to a continuous increase in smartphone shipments. In terms of products, the Turbo Fusion product line has been recognized by more customers, and continuous mass production and shipment is conducive to increasing the value of stand-alone machines. The company's overall mobile business is expected to maintain steady growth.

Vehicle-side products continue to be iterated, and payload capacity has grown rapidly. In 2023, the company's intelligent driving and other IoT smart device vision solutions achieved revenue of 74.29 million yuan, an increase of 67.26% over the previous year; in 1Q24, the business achieved revenue of 20.59 million yuan, an increase of 84.37% over the previous year. Among them, outboard algorithms such as AVM have been mass-produced on nearly 20 models, ADAS products with infrared night vision capabilities have also been introduced on a fixed basis, and Tahoe series products have been targeted for global mass production projects for various models by several overseas car manufacturers.

The company actively explores AIGC's innovative applications and products. In 2023, the company developed diffusion model image super-resolution, diffusion model image depth information, and AIGC starry sky magnification solutions for mobile phones. In addition, the company's smart shopping solution was rapidly iterated after launch, and clothing map generation and AI editing functions have been added to the product. It is expected that the market promotion of this product will be strengthened this year.

Investment advice: Maintain an increase in holdings rating. From 2024 to 2026, the company is expected to achieve revenue of 828/9.94/1,175 million yuan, an increase of 23.5%/20.0%/18.2% year on year; net profit to mother of 135/2.01/274 million yuan, an increase of 52.3%/49.1%/36.5% year on year.

Risk warning: The development and promotion of smart commercial products fell short of expectations; the recovery of smartphone shipments fell short of expectations; and the targeted implementation of the car-end business fell short of expectations.