The company is a leader in LED display control and video processing systems in China, and its share has continued to expand over the past three years. The company has a competitive advantage in terms of technology and customers. The revenue growth rate of the company's LED display control system in the past three years was significantly higher than that of the industry and competitors, and its customer acquisition capacity was strong. Currently, the company's domestic market share is absolutely leading. According to estimates, in 2023, the company's share of the domestic LED display control and video processing system market was about 68%, and the domestic market share of single video processing systems was over 50%.

Going overseas leverages its competitive advantage and brings growth alpha to the company. The global LED market will continue to grow at a compound annual growth rate of 18.4% over the next three years. The American and EMEA (including Europe, Middle East and Africa) markets will grow at a compound annual growth rate of 22.73% and 21.5%, respectively. Compared with the domestic market, the overseas market is growing faster. The company relied on its advantages in product cost performance, sales and service system, overseas event hosting experience and brand to expand overseas markets, and both revenue and gross margin increased. Barco is the company's main competitor overseas. Compared with that, in addition to the significant cost performance advantage of its products, the company is more focused on its main business and more invested in R&D. The company's overseas revenue grew rapidly in 2020-2023, and the overseas gross margin of the product was much higher than that of the domestic market.

Technological innovation in the industry has brought growth beta to the company. The advantages of small-pitch LED products combined to reduce costs, and demand for commercial and household displays has increased. Starting in 2022, the penetration rate of small-pitch LEDs will accelerate to 60%, and it is a mainstream product now and in the next few years. Following the general trend of MLED, 2025 will usher in a year of large-scale application implementation. Currently, the global penetration rate is about 5%, and it is expected to increase to 10% by 2027. 8K Ultra HD technology places higher demands on the number and performance of display control systems, and XR and 3D naked eye bring new growth points. With the popularity of ultra-high-definition video, the core position of video processing systems has risen, and the average price has risen. The trend of integrating video processing systems with sending cards helps increase the company's customer stickiness.

Market growth estimate: For small-pitch LEDs (P2.5-P1), the sales growth rate of receiving cards is equal to the growth rate of LED shipping area; for MLEDs (P<1), the sales growth rate of receiving cards is greater than the growth rate of LED shipping area. Therefore, the growth rate of the LED display control system market is greater than and relatively close to the growth rate of the LED industry's shipping area. Due to the decline in the price of LED per unit area, the growth rate of LED shipping area is greater than the growth rate of sales. The video processing equipment market is also driven by small spacing and high resolution. The seamless splicing and high definition of small-pitch LED displays place higher technical requirements on video processing equipment. Demand for video splicers has increased, and video controllers have gradually formed a 1:1 correspondence with transmission cards. As point spacing shrinks, video processing equipment continues to increase in the cost ratio of LED displays. Assuming that future video processing equipment accounts for an average of 6% of the cost of LED displays (about 4% in 2023), the global video processing equipment market space is about 8.4 billion in 2027, and the compound annual growth rate from 2023-2027 is over 35%.

Investment advice: We expect the company to achieve operating income of 3.833/5.068/6.726 billion yuan in 2024-2026, up 25.49%/32.24%/32.70% year on year; achieve net profit of 0.808/1.139/1.555 billion yuan, up 33.16%/40.87%/36.59% year on year; current stock price corresponding to PE is 22.24/15.79/11.56 times, respectively. Covered for the first time, giving it a “Recommended” rating.

Risk warning: risk of changes in downstream demand; risk of increased market competition; risk of falling short of expectations in the application of new technologies.