Key points of investment:

Event: On April 18, 2024, ArcSoft released the 2023 Annual Report and the First Quarter 2024 Report.

In 2023, the company achieved revenue of 670 million yuan, a year-on-year increase of 26.07%, and achieved net profit of 88 million yuan to mother, an increase of 53.03% over the previous year. 2024Q1 achieved revenue of 184 million yuan, a year-on-year increase of 13.93%, and realized net profit of 34 million yuan, an increase of 21.21% over the previous year.

Revenue and profit in the 2023 annual report are generally in line with previous earnings forecasts. The full year of 2023 achieved a 26.07% year-on-year increase in revenue and a 53.03% year-on-year increase in net profit. The high increase in revenue and profit was mainly due to the good development of the company's mobile phone business during the reporting period, driving mobile smart terminal vision solutions to achieve revenue of 580 million yuan.

The smart terminal and smart car business both grew. The company's overall gross margin was 90.35%, up 1.86 pct:1) The company's mobile smart terminal business bucked the trend during the reporting period, achieving revenue of 581 million yuan, an increase of 22.82% over the previous year. 2) The smart car business progressed in an orderly manner, achieving revenue of 74 million yuan, an increase of 67.26% over the previous year.

Explore innovative applications based on AIGC, launch smart commercials for new products, and empower smart terminal and smart car businesses to increase overall software gross margin.

Expenses increased during the period as the business expanded, and the overall cost rate remained stable. In 2023, the company continued to increase R&D investment. R&D expenses were 363 million yuan, up 25.99% year on year; management expenses were 91 million yuan, up 28.38% year on year; sales expenses were 118 million yuan, up 32.41% year on year.

The company is optimistic about sales and strengthens repayment management. In 2023, the company's net cash inflow from operating activities was 260 million yuan, an increase of 472.55% over the previous year, mainly due to the company's increased product recognition, increased customer prepayments, and the company's strengthened repayment management.

2024Q1 profit exceeded expectations, and revenue was in line with market expectations. 2024Q1, the company's revenue was 184 million yuan, up 13.93% year on year, and achieved net profit of 34 million yuan, up 21.21% year on year. Previously, the market expected 24Q1 revenue growth rate of 10%-15%, profit of about 15%. Revenue was in line with expectations, and profit exceeded expectations.

Maintain an “Overweight” rating. Considering the good development of the company's smartphone and smart car business, it is expected that 2024-2025 will continue to grow as AIGC is widely used in smart terminals and automobiles, slightly increasing the company's revenue forecast for 2024-2025 to 8.62 billion yuan and 1,079 million yuan, compared to the original forecast of 8.56 billion yuan and 1,073 million yuan. Considering that the company will increase AIGC's R&D investment and overseas business investment, the 2024-2025 net profit forecast was lowered to 1.98 million yuan or 319 million yuan, compared to the original forecast of 258 million yuan and 322 million yuan. Additional revenue and profit forecasts for 2026 were 1,236 million yuan or 404 million yuan. Considering the broad development space of AIGC, smart terminals, and intelligent driving, the “gain” rating is maintained.

Risk warning: New product development falls short of expectations, and downstream customers are affected by macroeconomics to reduce their budgets.