The 2023 results fell short of our expectations. The 1Q24 results were in line with our expectations Guangfeng Technology announced 2023 results: operating income of 2,213 billion yuan, down 13% year on year, and net profit of 133 million yuan to mother, corresponding to profit of 0.29 yuan per share, up 12% year on year, lower than our expectations. Corresponding to the 4Q23 single quarter, Guangfeng achieved operating income of 563 million yuan, a year-on-year decrease of 15%, and a net profit loss of 25 million yuan to mother, and continued year-on-year losses. We believe that Guangfeng 4Q23's performance is under pressure, mainly due to:

1) The company accrued asset impairment losses of RMB 37 million in a single quarter, mainly due to the impairment of inventory and contract performance costs; 2) The company adjusted its product structure, compounded the lower profit in the early stages of new business development, and 4Q23 gross margin decreased 5.50/8.28 ppt to 30.63% year-on-year.

2023 segment business, Guangfeng: 1) Cinema screening business: revenue of 369 million yuan, an increase of 37% year on year. We think it mainly benefited from a recovery in the number of moviegoers and an increase in high-quality film sources; 2) Professional display: revenue of 428 million yuan, which is basically the same year on year. We think downstream engineering demand is weak, a slight drag, but the education market performed well and increased year on year; 3) Feng Mi: Revenue in 2023 fell 34% year on year to 766 million yuan. We think the main reason is that the company actively adjusted its product structure and controlled losses.

Meanwhile, Guangfeng announced 1Q24 results: operating income of 445 million yuan, a year-on-year decrease of 3%, and net profit to mother of 45 million yuan, an increase of 226% year-on-year. It met our expectations.

Development trends

Vehicle optical emissions have received several fixed points and can be expected to grow in the future. According to the company's announcement, Guangfeng has received 6 on-board designated projects in 2023. Among them, the first fixed-point model was intensively delivered in March of this year, and Guangfeng 1Q24 has achieved revenue confirmation of 48 million yuan. In addition, Guangfeng unveiled a variety of new automotive optical products at the Beijing Auto Show this year, which is expected to continue to be targeted by customers through product innovation and promote the company's growth.

The cinema business is developing steadily and Fengmi adjusted its strategy to reduce losses. 1) According to the company's announcement, Guangfeng has installed more than 29,500 ALPD cinemas at the end of 2023 and developed VLED LEDcinema solutions to lay out the direction of future cinema upgrades. 1Q24 Guangfeng has achieved cinema-related revenue of 153 million yuan, an increase of 21% over the previous year. We are optimistic that Guangfeng will rely on the industrial chain card position, and it is expected that it will continue to drive the growth of cinema-related businesses through technological innovation. 2) In terms of Fengmi, Guangfeng 2023 and 1Q24 continued to optimize management to reduce loss and drag. According to the announcement, 1Q24 Fengmi reduced losses by about 15 million yuan year on year, and the loss margin decreased by 40% year on year, and Guangfeng plans to continue to focus on more competitive private brand products, while leveraging the advantages of products going overseas, continuously improving product experience and optimizing profitability.

Profit forecasting and valuation

Considering weak downstream demand for household and professional displays, we reduced the EPS of Guangfeng 2024e by 20% to 0.42 yuan after dilution, and introduced the 2025e EPS 0.62 yuan. The current stock price corresponds to 2024/25e47.1/31.4x P/E. We maintained our outperforming industry rating and lowered our target price by 20% to 24.8 yuan at the same time, corresponding to 2024/25e 59.7/39.8x P/E, compared to the current 27% increase.

risks

Demand in fields such as cinemas and professional displays is weak; the development of new businesses such as automotive optics falls short of expectations.