Incident: The company released its 2023 annual report and 2024 quarterly report. The company achieved revenue of 2,857 billion yuan in 2023, an increase of 15.08% over the previous year; achieved net profit of 0.14 million yuan, which turned a loss into a profit year on year; realized deducted non-net profit of 101 million yuan, turning a loss into a profit year on year. In Q1 2024, we achieved revenue of 837 million yuan, up 84.31% year on year, down 22.78% month on month; realized net profit of 0.14 million yuan, turning loss into profit year on year, down 82.40% month on month; deducting non-net profit of 20 million yuan, turning loss into profit year on year, down 67.61% month on month.

The 23-year performance resumed growth, and Q1 profit in Q24 turned a year-on-year profit: the company's performance resumed growth in the full year of 2023, mainly due to the company's continued deep cultivation in the fields of smartphones, automotive electronics and smart security, strengthening product development and marketing, and promoting product sales. The company's profit in Q1 in 2024 turned a year-on-year loss into a profit, mainly due to: 1. The recovery in demand in the downstream market has led to an increase in sales revenue; 2. The company's gross margin has increased due to multiple factors such as improved R&D efficiency, enhanced cost management capabilities, and effective control of product costs. In Q1 2024, the company's gross margin was 21.26%, up 1.47 pcts year on year, down 1.42 pcts month on month; the company's net margin was 1.68%, up 7.33 pcts year on year, down 5.67 pcts month on month. In terms of expenses, the company's sales, management, R&D and financial expenses in Q1 2024 were 2.64%/2.54%/10.73%/3.02%, respectively, with year-on-year changes of -1.85/-1.64/-5.72/+1.58pct, respectively. The company's expense ratio declined year-on-year during the period, and the company achieved remarkable results in reducing costs and increasing efficiency. Expected shipments of the company's high-end 50 megapixel products increased further in Q1 2024; the company actively stocked such products to meet customer needs, so the inventory balance increased by 24.93%.

Technological advantages empower high-end smart security products, and the automotive electronics business is growing strongly: in 2023, the company's smart security industry revenue was 1,671 billion yuan, up 0.41% year on year, accounting for 58.49% of main revenue. As a leading enterprise in the global smart security CIS, the company continues to make efforts in the high-end field. It has successfully launched cutting-edge security product portfolios such as the Pro Series full performance upgrade series, AI Series advanced imaging series, and SL Series Super Starlight Level Series to better meet the intelligent stage of security monitoring. The company has also 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, successfully starting the path of iterative upgrading of AI series products.

In 2023, the company achieved sales revenue of 294 million yuan in the automotive electronics sector, an increase of 30.45% over the previous year, accounting for 10.30% of the main revenue. The company has released more than 10 products for the three major application scenarios of in-vehicle imaging, sensing, and cabin, covering the segmented application requirements of car sensing and imaging with a resolution of 1MP to 8MP. The company's automotive CIS products have been mass-produced by major car manufacturers such as BYD, SAIC, Dongfeng Nissan, Great Wall, Ssangyong, Zero Sport, Chery, Guangzhou Automobile, Jiangling, and Geely. With the continuous development of intelligent and autonomous vehicles and the continuous increase in the front-loading rate of panoramic surround view, the automotive electronics business will also become a powerful engine for the company's long-term sustainable development.

The CIS mobile phone market has broad prospects, and high-end mobile CIS products form the second growth curve: According to the TechInsights report, although the global smartphone market experienced a year-on-year decline in 2023, the sales scale of the global smartphone image sensor market increased slightly year-on-year, reaching 14 billion US dollars. In 2023, the overall CIS mobile phone market size stabilized, mobile phone terminals entered the stock market, and high-end smartphone consumers demanded more and more camera shooting performance. Under this trend, CIS, as the core imaging device, has become a key selling point for major mobile phone manufacturers to improve the user experience, and the smartphone CIS market pattern is rapidly changing. In 2023, the company's smartphone CIS products covered the current mainstream demand in the mobile phone market. The product resolution ranges from 800,000 pixels to 50 million pixels, and achieved annual revenue of 892 million yuan, an increase of 50.40% over the previous year, accounting for 31.21% of the main revenue.

Aiming at the high-end flagship product circuit, several XS series high-end products for flagship camera owners and auxiliary cameras (including telephoto and wide-angle) have been shipped on a large scale, opening up a second growth curve for the company's revenue. Aiming at the mainstream smartphone CIS market, the company has carried out in-depth technical cooperation with domestic fabs, using technological innovations such as single-chip integration to launch more cost-effective high-resolution products that better meet the needs of mainstream smartphones. At the same time, the company continues to improve the product's dynamic range, reduce noise, optimize power consumption, etc., further improve the differentiated product matrix, bring excellent imaging performance to smartphone imaging systems, and continuously enhance the company's market position and brand influence in the smartphone field.

Profit forecast raised to “buy” rating: In 2023, as macroeconomic recovery and the import substitution process of high-end products continue to heat up, the popularity of the smart security industry is expected to pick up, the company's market size in the smart security industry is expected to rise again, and along with the layout in the automotive electronics and consumer electronics fields, it is expected to achieve steady growth in turnover. The company continues to improve the dynamic range, noise reduction, and power consumption optimization of mobile phone CIS products, further improve the differentiated product matrix, and continue to enhance the company's market position and brand influence in the smartphone field; we are optimistic about the company's layout in high-end mobile CIS, and high-end mobile CIS products are expected to continue to contribute to the company's performance growth, so we raised our profit forecast and raised it to a “buy” rating. The net profit of the company is estimated to be 425 million yuan, 589 million yuan, and 788 million yuan respectively. 1.06 yuan, 1.47 yuan, 1.97 yuan, corresponding PE is 42X, 31X, 23X, respectively.

Risk warning: risk of exchange rate fluctuations, downstream demand recovery falling short of expectations, risk of technological innovation, risk of market competition.