Event: The company released its 2023 annual report. Revenue in 2023 was 20.42 billion yuan, down 1% year on year; gross profit margin was 16.9%, down 1.4pp year on year; net profit was 740 million yuan, down 9.9% year on year. Among them, revenue for the second half of 2023 was 11.2 billion yuan, down 0.1% year on year; gross profit margin was 19.2%, up 1.4pp year on year; and net profit was 590 million yuan, up 25.2% year on year. Results improved significantly in the second half of 2023, and an inflection point in the company's performance began to appear.

The upgraded specifications were upgraded to improve the acoustics ASP, and the acquisition of PSS was launched to expand the automotive market. The company's acoustics business revenue in 2023 was 7.5 billion yuan, a year-on-year decrease of 15.4%. Among them, 2023H2 revenue was 4.18 billion yuan, up 25.7% month-on-month; gross margin was 30.7%, up 1.8 pp year on year, and 5.2 pp month-on-month. 2023H2 led to a 10% month-on-month increase in ASP due to smartphone demand for acoustic product specification upgrades. The company's SLS Master Speaker shipments exceeded 10 million units. The company completed the acquisition of 80% of PSS's shares in February 2024 to accelerate expansion in the automotive field.

Improved profitability in the optical business. The revenue of the optical business in 2023 was 3.63 billion yuan, up 12.7% year on year, and the gross profit margin was -13%, the same year on year. Among them, 2023H2 revenue was 1.86 billion yuan, up 36% year on year and 4.8% month on month; gross margin was -9.2%, up 20.5 pp year on year and 7.8 pp month on month. The company's lens product structure continued to be upgraded. Shipments of 5P lenses and above increased 37% year on year, and 6P lens shipments accounted for nearly 14%; WLG shipped 3.4 million glass plastic hybrid lenses, an increase of 22% year on year.

The high-end market share of touch motors increased, and precision structural components grew rapidly. The company's electromagnetic transmission and precision structural parts business generated revenue of 8.25 billion yuan in 2023, an increase of 13.3% over the previous year, mainly due to the application of touch motors, metal frames, shafts, VC cooling plates, etc. in more folding machines and high-end flagship machines. In terms of electromagnetic transmission, horizontal linear motor shipments increased by 13.3%, increasing the market share of flagship aircraft. In terms of precision structural parts, metal frame revenue increased by 34.3% year-on-year, and both shipments and ASP achieved double-digit increases; nearly 700,000 hinges were shipped; and cooling revenue increased by more than 100%.

AI phones may push for MEMS microphone specification upgrades. The sensor and semiconductor business had revenue of $1.03 billion in 2023, a year-on-year decrease of 18.4%; gross profit margin was 13.6%, an increase of 2pp over the previous year. AI phones place higher demands on MEMS microphones in terms of sensitivity, signal-to-noise ratio, spatial positioning and noise reduction, frequency response range, and low power consumption, or drive a new growth curve for the company's MEMS microphone business.

Profit forecast and rating: The compound growth rate of the company's net profit to mother is expected to be 40.6% in 2024-2026. Considering many improvements in the company's business operations, the performance began to reach an inflection point. In 2024, 25 times PE was given, corresponding to a target price of HK$32.50 (HKD/RMB exchange rate of 0.9077), and a “buy” rating was given.

Risk warning: Demand for mobile phones falls short of expectations; optical business reverses or falls short of expectations; risk of increased competition.