Incident: On the evening of April 26, the company released its 2023 annual report and the first quarter report of 2024. Throughout 2023, the company achieved revenue of 2,857 billion yuan, a year-on-year increase of 15.08%, and achieved net profit of 14 million yuan to mother, an increase of 117.18% over the previous year. The 24Q1 company achieved revenue of 837 million yuan, an increase of 84.31% year on year and a decrease of 22.78% month on month; net profit to mother of 0.14 million yuan, an increase of 154.62% year on year and a decrease of 82.40% month on month.

Turned a loss into a profit in '23, and the 24Q1 security+mobile phone double increase contributed to a year-on-year increase in revenue. In 24Q1, the company's revenue reached the second highest level since listing, second only to 23Q4. In terms of profitability, 24Q1's gross sales margin was 21.26%, up 1.47 pct year on year, and decreased by 1.42 pct month on month. The main reason for 24Q1's revenue growth is growth in the smart security and smartphone sector: in the smart security field, the downstream market is picking up, and the company's iterative product performance and competitiveness are improving; in the smartphone field, shipments of the company's XS series high-end 50 megapixel products used in flagship mobile phone main cameras, wide-angle, and telephoto lenses have increased, and cooperation with customers has deepened, and market share continues to increase. The company's net profit attributable to the mother was under month-on-month pressure due to the increase in employee equity incentive program expenses and the rise in exchange losses during the reporting period. Looking at the full year of 2023, the company turned a loss into a profit. By business, smart security achieved revenue of 1,671 billion yuan in '23, an increase of 0.41%; smartphones achieved revenue of 892 million yuan, an increase of 50.40% year on year, and the automotive electronics business achieved revenue of 294 million yuan, an increase of 30.45% year on year.

The company's gross margin for the full year of '23 was 19.96%, down 2.18pct from '22.

Mobile phone 50 megapixel products shape the second growth curve, and security is improving 24Q1. (1) Smart security: In 2023, the company launched several new upgraded AI series CMOS image sensors, which combine the advantages of better night vision full-color imaging, high temperature imaging, and low power consumption performance, which can better empower smart wireless cameras and multi-camera solutions such as home IPC and AIoT terminals. In 24Q1, the downstream smart security market has picked up somewhat. (2) Smartphones: In 2023, cooperation between the company and existing customers in various product fields continued to deepen, and the market share continued to increase. In particular, many XS series 50 megapixel products were successfully mass-produced. These products are mainly used in high-end flagship phones, such as main cameras, wide-angle, telephoto cameras, etc., and the unit price is high, opening up a second growth curve for the company's revenue in the smartphone sector. (3) Automotive electronics: The company's automotive CIS products have been mass-produced by major car manufacturers such as BYD, SAIC, Dongfeng Nissan, Great Wall, Korea Ssangyong, Zero Sport, Chery, GAC, Jiangling, and Geely. According to the YOLE report, in 2022, the company already ranked fourth in the world and second in the country in the automotive CIS market.

Equity incentives demonstrate confidence in the growth of the two major businesses of consumer electronics CIS and automotive CIS. On September 22, 2023, the company released the “Company's 2023 Restricted Stock Incentive Plan (Draft)”. The first restricted stock performance assessment target granted was based on net profit (excluding the impact of share payment fees) or new business (referring to consumer electronics CIS and automotive CIS) shipments: target 23/24/25 net profit greater than 0/2/4, respectively; or 23/24/25 new business shipments greater than 2/23/260 million units (194 million units in '22). If the incentive is achieved, it is estimated that share payment fees of RMB 1.10/0.50/021 million will be generated in 24/25/26, respectively. The assessment goals of the company's equity incentives demonstrate the company's firm confidence in releasing profits and continuing growth in new businesses.

Investment advice: We are optimistic about the company's leading position in the security CIS field, the positive progress it has made in expanding the consumer electronics and automotive electronics fields, and the continuous growth performance. The company is expected to achieve revenue of 42.36\ 56.12\ 6.948 billion yuan in 24-26 years, and achieve net profit of 2.87\ 5.08\ 679 million yuan, corresponding to the market value on April 30, at 67/38/28 times PE, respectively, to maintain a “buy” rating.

Risk warning: Downstream demand falls short of expectations, the company's R&D process falls short of expectations, and the risk of upstream price increases.