Incident: The company released the 2023 annual report and the 2024 quarterly report. For the full year of 2023, the company achieved operating income of 2,068 billion yuan, a year-on-year decrease of 4.87%; realized net profit of 43 million yuan, a year-on-year decrease of 79.26%; and realized deduction of non-net profit of 33 million yuan, a year-on-year decrease of 80.37%. In 2024, Q1 achieved operating income of 542 million yuan, a year-on-year increase of 27.45%, and a month-on-month increase of 2.61%; net profit to mother of 0.31 million yuan, an increase of 151.55% year-on-year, which significantly reversed losses from month to month; after deducting non-net profit of 0.36 million yuan, an increase of 883.58% year-on-year.

Demand was weak, and the profit side improved sharply in 1Q24: the company's performance declined year-on-year in 2023. The main reason was that the company's small to medium size products were affected by poor downstream and terminal demand, and share growth slowed; the company temporarily had no supply in the 65-inch TV market with high demand and high gross margin due to short-term restrictions on existing production lines. The price of 32-inch TV products with high supply volume was fierce, and the unit sales price declined by a certain margin. In terms of profitability, the company's comprehensive gross margin in 2023 was 14.81%, -6.61 pcts year on year; net margin was 2.08%, -7.69 pcts year on year. In terms of expenses, the company's sales, management, R&D, and financial expenses rates in 2023 were 0.63%/3.06%/6.41%/1.10%, respectively, and the year-on-year changes were -0.10/-0.22/+0.42/-0.24pct, respectively. Among them, the company's management expenses rate and values all declined year on year, mainly due to a decrease in insurance premiums and share payments. In the first quarter of 2024, thanks to the recovery in industry sentiment, the company's performance improved significantly year-on-year. In Q1 2024, the company's comprehensive gross margin was 17.27%, +3.05 pcts year on year; net margin was 5.73%, +2.79 pcts year on year, and profitability was restored.

Investing in the production capacity of polarizers for large-size TVs to develop new profit growth poles: In 2023, the company will accelerate the construction of the second 1720mm production line in Hefei. The production line is expected to be put into operation and capacity released in 2024, thereby making up for the company's shortcomings in large-size TVs above 65 inches. Combined with the gradual increase in the domestic production rate of raw materials supporting the current domestic and 1720mm polarizer production lines, the company's competitiveness in large-size TV applications is expected to continue to improve. In the field of mobile LCD products, the company's fully automatic cutting production line has achieved technological breakthroughs and continued promotion to major customers to achieve mass production and shipment, and the results of reducing staff, reducing costs, and increasing efficiency are expected to become more and more prominent; in the OLED product field, the company is still increasing capital investment in order to achieve rapid growth in the share of this product. At present, the company's laptop product technology is mature, and the company is strengthening its market development efforts in this field; in the future, with the release of new production line capacity and further optimization of the original production line structure, benefiting from the fact that laptop product share still has a large market space, the company's laptop business is expected to become a new engine of profit growth.

A multi-point breakthrough in AMOLED product development, and the automotive & VR dual engine is expected to improve profits: in terms of small to medium size, the company focuses on promoting the development and promotion of flexible AMOLED polarizers, 9μm ultra-thin PVA polarizers, ultra-high transmittance LCD polarizers, and 150μm thick LCD polarizers.

Among them, flexible AMOLED polarizers have been tested by multiple panel manufacturers and have achieved stable mass production, and have been applied to 3D fixed flexible mobile phones; AMOLED polarizers for IT applications have been verified by some customers, and the company will build an AMOLED-specific coating composite production line; 9μm ultra-thin PVA polarizers have been tested by some customers and will soon be mass-produced; and LCD polarizers with a combined thickness of 150 μm have also been mass-produced. In terms of large-size TVs, the company focuses on promoting the development of hydrophobic polarizers and UV adhesive polarizers to replace TAC materials. Currently, the R&D project has been completed. In the future, as the installation and commissioning of the Hefei Phase II production line progresses, sample delivery and verification will begin one after another. At the same time, the company is also actively promoting the testing, verification and process development of domestic raw materials in the TV field. At present, it has made breakthrough progress. Polarizers with nationally produced raw materials other than phase compensation films have passed customer certification and achieved small-batch production. In terms of automotive polarizers, the automotive iodine polarizers with the current pre-drying program have stabilized at 95℃ x 1000H, and have continued to achieve mass production results in the post-loading automotive market; automotive dye-based polarizers have been widely mass-produced in black and white vehicles and other outdoor equipment, and derivatives of high-durability dye polarizers have also made breakthroughs in emerging application fields such as automotive HUD, and have received small-batch orders from customers. In addition, the company's polarizer products for AR/VR headsets are still being iterated and are being jointly developed and tested with a number of well-known AR/VR manufacturers; customer promotion and design optimization of half-wear reverse polarizers are also progressing steadily.

Lowering profit forecasts and maintaining a “buy” rating: The company is one of the few domestic enterprises with the capacity to produce polarizers for traditional passive displays, TFT and OLED, and has become a qualified supplier for major domestic display panels and major display module manufacturers. In 2023, the company continued to expand new areas of product application, increase the proportion of high-value-added products, and continuously optimize the business structure. The main business performance was strong, and the share increased significantly, achieving total sales volume of polarizers of 25.36 million square meters, an increase of 10.94% over the previous year. At the same time, the company actively promoted domestic production capacity layout and accelerated the construction and launch of new automated production lines at production bases such as Putian and Hefei, providing strong support for the company to continue to obtain orders. Looking ahead, the company's profits are expected to recover further as demand for consumer electronics picks up, the company's production capacity for large-size TVs is released, and the integrated polarizer layout continues to advance. The profit forecast was lowered considering that the recovery in consumer electronics demand fell short of expectations. We estimate that the company's net profit for 2024-2026 will be 183 million yuan, 235 million yuan, and 370 million yuan respectively; EPS will be 1.05 yuan, 1.35 yuan, 2.13 yuan, and PE will be 24X, 19X, and 12X respectively.

Risk warning: Product single risk, raw material supply concentration and price fluctuation risk, risk of falling gross margin of main business, risk of macroeconomic fluctuations and policy changes.