The 2023 results are in line with our expectations, and the 1Q24 results are lower than our expectations. The company announced its 2023 and 1Q24 results: 1) Achieved operating income of RMB 3,557 million in 2023, -15.77% YoY; net profit to mother was RMB 121 million, or -75.97% YoY. It is proposed to pay a cash dividend of 3 yuan for every 10 shares, corresponding to a cash dividend rate of 17%. 2) Corresponding to 4Q23 operating income of 1,135 million yuan, -15.31% year-on-year; net profit to mother of 34 million yuan, -80% year-on-year. 3) In 1Q24, the company achieved operating income of 825 million yuan, -6.59% year-on-year; net profit to mother of 14.32 million yuan, -72.57% year-on-year. The company's 2023 results are in line with previous performance reports and our expectations. The 1Q24 performance fell short of our expectations, mainly due to the fact that the Japanese market is still being adjusted and domestic product price discounts have not been narrowed, putting pressure on profitability.
Sales gradually stabilized, and average prices dragged down revenue performance. 1) Affected by the domestic consumer environment since 2023, demand for smart micro investment has been weak. According to Lotu data, domestic smart projection sales were -17%/-5%, respectively, in 2023/1Q24, and brand competition was fierce. 2) Beginning with 2H23, the company responded to competition through measures such as product subsidies and product portfolio adjustments. We estimate that sales volume may have stabilized since 1Q24, but the decline in average prices dragged down revenue performance. 3Q23/4Q23/1Q24 revenue was -6%/-15%/-7%, respectively. 3) By product, we estimate that the high-end RS series and the low-end Play series performed well in 1Q24. 4) The company firmly lays out its own brands to go overseas, benefiting from channel expansion in the European and American markets. In 2023, overseas revenue was +16%, and the share increased to 26%. We estimate that 1Q24 will still maintain a good trend, but the Japanese market's brand business and channel layout are still in the adjustment period, causing a certain drag on overseas revenue and profits in the short term.
Financial analysis: 1) The decline in product prices and the increase in the share of the Douyin channel have all led to significant pressure on the company's profitability. 3Q23/4Q23/1Q24 gross margins were 29.5%/27.9%/28.1%, respectively, down 6-7 percentage points year-on-year. 2) The company accounts for a high proportion of R&D personnel, continues to focus on technology and product innovation, and sales expenses are also rigid. The overall cost rate was high due to the decline in revenue scale. The cost rate for the 2023/1Q24 period was 33%/31%, respectively, +6.6pp/ +0.5ppt compared to the same period. 3) The cash flow from 1Q24 operating activities was 146 million yuan, and the performance was significantly better than net profit.
Development trends
In the domestic market, the company is still the industry leader in the DLP field, and its share is still relatively stable against the backdrop of pressure on industry demand. In 2024, the new high-end product RS 10 Ultra and the new low-end product Play 5 are responding positively.
In overseas markets, the company's product strength is leading, and the superposition channel layout continues to expand. We expect to continue to drive scale and performance growth in the medium to long term.
Profit forecasting and valuation
Considering that profitability is still weak due to the decline in average product prices, we lowered our 2024/2025 net profit by 22%/6% to 255 million yuan/375 million yuan. The current stock price corresponds to the 2024/2025 price-earnings ratio of 26.9 times/18.2 times the price-earnings ratio. Maintaining an outperforming industry rating and considering the recent recovery in sector valuations, we maintain a target price of 120 yuan, which corresponds to 33.0 times the price-earnings ratio of 2024 and 22.4 times the price-earnings ratio of 2025. There is 22.8% upside compared to the current stock price.
risks
Competition increases risk; risk of new product sales falling short of expectations; risk of fluctuating raw material prices.