Core views

Focusing on the field of computer vision, ArcSoft Technology provides algorithm licensing and system solutions to the industry. It is the world's leading AI vision enterprise, and has always been committed to the development and application of visual artificial intelligence technology. In 2024, all of the company's businesses experienced a good situation. 1) The terminal business benefited from the gradual recovery of downstream smartphone shipments and the need for camera algorithm upgrades, and the company's revenue gradually recovered steadily; 2) the smart car business, which the company had been investing in for a long time, entered a fixed shipping period, and related businesses are expected to achieve rapid growth; 3) As one of the leading companies in AI+ implementation, the company is expected to enter a large scale of implementation and generate a certain amount of revenue within the year. Based on the above, the company expects revenue for 2024-2026 to be 815/9.90/1,181 million yuan, respectively, with year-on-year growth rates of 21.59%/21.49%/19.32%, and net profit to mother of 1.28/1.67/ 197 million yuan, respectively. The year-on-year growth rates are 44.97%/30.22%/17.96%, respectively, maintaining the “buy” rating.

Core logic

1. Revenue from the automobile business, which has been invested for a long time, began to grow, and the second curve was gradually realized. ArcSoft's smart car vision solutions include VisDrive and Westlake. Among them, VisDrive is currently the main revenue source, and Westlake is likely to generate revenue in 2024 and beyond. In 2018-2023, the revenue of ArcSoft Technology's intelligent driving and other IoT smart device vision solutions increased from 3.679,500 yuan to 74.294 million yuan, with a CAGR of 82.40%; on the gross margin side, with the gradual implementation of the company's intelligent driving-related products, the intelligent driving and other IoT smart device vision solutions business gradually changed to the delivery of pure software products. Hardware costs decreased accordingly, and gross margin continued to rise, reaching 85.96% in 2023. It is expected that the smart car business in 2024 will achieve a high speed of about 90% growth.

2. The AIGC trend and increased competitive pressure on the consumer circuit. Demand for using AI marketing to reduce costs is becoming more and more strong in the current situation. We predict that the long-term market space for AI commercials will be more than 10 billion dollars, the company has sufficient technical reserves, and has a first-mover advantage. China's traditional commercial market is about 132.67 billion yuan, including the domestic market of 118.58 billion yuan and the overseas market of 14.09 billion yuan. AI can reduce costs by 90%. Assuming that the AI commercial penetration rate in the early days of the industry is 30% optimistic and 10% pessimistic, the short-term AI commercial market size is 13.3-3.98 billion yuan, and the long-term AI commercial market size can reach 10.6 billion yuan (80% replacing tradition). At the same time, considering that AI commercial sales are expected to penetrate online retail product categories such as beauty and daily necessities, this market space may continue to expand.

3. The traditional terminal business has ushered in a moderate recovery phase in the smartphone market, and the share of high-end models has increased, which is conducive to the sale of Turbo Fusion modules at high customer prices. According to IDC data, global smartphone shipments have experienced a recovery after a total of 9 quarters of decline from 3Q21-3Q23. Among them, 4Q23/1Q24 shipments were 326/289 million units respectively, up 8.5%/7.8% year-on-year. Overall, despite still facing macroeconomic challenges, the smartphone market has completed the inventory removal process and is about to enter a moderate recovery phase. According to Counterpoint Research, the share of high-end smartphones has tripled from 6% in 2016 to 24% in 2023.

Investment advice: The company expects revenue for 2024-2026 to be 815/9.90/1,181 billion yuan, respectively, with year-on-year growth rates of 21.59%/21.49%/19.32%, and net profit to mother of 1.28/1.67/ 197 million yuan, respectively. The year-on-year growth rates are 44.97%/30.22%/17.96%, respectively, maintaining the “buy” rating.