Core views

In 2023, the company continued to grow against the backdrop of global smartphone shipments hitting a ten-year low, achieving operating income of 670 million yuan, an increase of 26.07% over the previous year, and achieved net profit of 88 million yuan, an increase of 53.03% over the previous year. In the first quarter of 2024, the company achieved operating income of 184 million yuan, an increase of 13.94% over the previous year, and realized net profit of 34 million yuan, an increase of 21.21% over the previous year. As mobile phone sales have begun to rebound since 4Q23, and the company's smart car products have broken through and expanded one after another, compounded by the company's innovative application layout under the AIGC wave, we believe the company is expected to achieve more business growth in 2024 and continue to grow in revenue. We predict that in 2024-2026, the company will achieve operating income of 8.15, 9.90, and 1,181 million yuan, and net profit of 1.34, 1.78, and 223 million yuan, raising the “buy” rating. Increase the “buy” rating.

occurrences

The company announced the 2023 Annual Report and the 2024 First Quarter Report. In 2023, the company achieved operating income of 670 million yuan, an increase of 26.07% over the previous year; achieved net profit of 88 million yuan, an increase of 53.03% over the previous year; and realized net profit of 68 million yuan without return to mother, an increase of 898.87% over the previous year. In the first quarter of 2024, the company achieved operating income of 184 million yuan, an increase of 13.94% year on year; realized net profit of 34 million yuan, an increase of 21.21% year on year; realized net profit of 30 million yuan without return to mother, an increase of 23.91% year on year.

Brief review

The Turbo Fusion architecture was upgraded, and the mobile terminal business bucked the trend. The company's mobile smart terminal vision solution business achieved revenue of 581 million yuan in 2023, an increase of 22.82% year on year; 1Q24 achieved revenue of 161 million yuan, an increase of 8.91% year on year. In 2023, the company's business continued to grow against the backdrop of global smartphone shipments hitting a ten-year low, mainly because the company upgraded the Turbo Fusion architecture and expanded visual solutions such as motion capture, portrait capture, telephoto capture, ultra-clear telephoto, and high-resolution super resolution, which won the favor of more customers. As mobile phone sales began to rebound in 4Q23, compounding the company's layout in XR and other fields, the company's mobile smart terminal business is expected to resume a high growth rate.

The smart car business grew quarterly, and related revenue continued to grow at a high rate. Benefiting from the increase in the launch of the company's designated models and the intelligent development trend of domestic new energy vehicles, the company's intelligent driving and other IoT smart device vision solutions business continued to grow, achieving revenue of 74 million yuan in 2023, an increase of 67.26% over the previous year; 1Q24 achieved revenue of 121 million yuan, an increase of 84.37% over the previous year. At present, the company has obtained Tier 1 designations from many car companies, and has accumulated dozens of mass-produced and shipped models equipped with the company's in-cabin algorithms. At the same time, the company also helped car companies go overseas, mass-producing and shipping more than 10 models of products, covering the European Union, the United Kingdom, Norway, Israel, Australia, New Zealand and other regions.

Seize the AIGC wave and explore innovative applications of products. With the continuous iteration of AI models, the integration of terminal application products and AI has further accelerated. In line with the trend, ArcSoft has actively explored AIGC-related layouts and launched a series of innovative products. On the mobile phone side, the company has developed solutions such as diffusion model image super-resolution, diffusion model image depth information, and AIGC starry sky magnification, which are used in scenes such as image quality enhancement and starry sky photography. It also cooperated with chip platform companies such as Qualcomm and MediaTek to implement AIGC applications on the Xiaolong 8 mobile chip and Tianji 9300 flagship platform; in the e-commerce industry, the company launched an AIGC-based smart shopping solution, using the ArcMuse computing technology engine to intelligently generate clothing model display maps; in addition, the company also applied AIGC to smart car business R&D and testing to accelerate the implementation of off-market products. It is expected that under the trend of AI+ terminals, the company is expected to continue to optimize solutions through cooperation with mainstream manufacturers, consolidate its market position, and open up room for growth.

Investment advice: With the gradual recovery of downstream smartphone shipments and the need to upgrade and iterative camera algorithms, the company's mobile terminal revenue gradually recovered. At the same time, the smart car business, which the company has been investing in for a long time, is entering a harvest period every quarter, and related businesses are expected to grow rapidly. Furthermore, as a leading enterprise in AI+ implementation, the company is expected to implement terminal solutions, commercial solutions, etc. developed in line with the AIGC wave and generate a certain amount of revenue within the year. We predict that in 2024-2026, the company will achieve operating income of 815, 9.90, and 1,181 million yuan, net profit to mother of 1.34, 1.78, and 223 million yuan, raising the “buy” rating.

Risk analysis

(1) Downstream smartphone recovery falls short of expectations: the company's mobile smart terminal vision solution business is significantly affected by the boom in the downstream smartphone industry, if the recovery falls short of expectations or adversely affects the company's performance; (2) Increased industry competition: many companies have already entered the visual artificial intelligence market, facing rapid iteration of technology and increased market difficulty, if the company is unable to maintain an advantage in competition with other vendors, or face the risk of declining performance; (3) AI empowerment falls short of expectations: if the company actively invests in AI applications and fails to meet expectations returns, company revenue may be affected;