Key points of investment:
24H1 performance: gross margin performance exceeds the company's target, and profitability has reached a new level
(1) Revenue: 24H1 achieved revenue of 0.92 billion yuan, YOY +38%, single Q2 revenue of 0.53 billion yuan, YOY +53%, and QoQ +38%. The next new class of cost-effective products ESP32- C3, C2, and the high-performance product line ESP32-S3 are in a phase of rapid growth this year. (2) Net profit to mother: 24H1 achieved net profit of 0.15 billion yuan, yoy +135%, single Q2 returned 0.098 billion yuan, yoy +192%, and qoq +81%. (3) Profitability exceeded expectations: 24H1 gross profit margin of 43.2%, +2.6pcts month-on-month, net profit margin 16.6%, +7.1pcts month-on-month; single Q2 gross profit margin 44.1%, +2.2pcts month-on-month, net profit margin 18.5%, month-on-month +4.6pcts. Previously, the company set a gross margin target of 40%, and 24H1 profitability increased significantly.
Industry: “Internet of Everything” has been upgraded to “Internet of Everything”. AIoT continues to penetrate the Internet of Things. There is broad room for development, and the momentum of AIoT penetration is undiminished. According to Statista's latest forecast, the number of global IoT device connections will be 18 billion in 2024, and this number is expected to grow to 39.6 billion by 2033, with a compound annual growth rate of 9.18%. According to IDC estimates, the number of IoT connections in China exceeded 6.6 billion in 2023, with a compound growth rate of about 16.4% over the next 5 years. From an industry perspective, the driving forces for the company's growth include: (1) The continuous increase in the smart home and smart consumer electronics penetration rate. Statista predicts that the global smart home market revenue will reach 154.4 billion US dollars in 2024, the compound annual growth rate will reach 10.67% in the next 5 years, and the market size will reach 231.6 billion US dollars by 2028. The household penetration rate of smart homes will grow from 18.9% in 2024 to 33.2% in 2028. (2) Intelligence in other industries such as industrial control starts from 0 to 1, and the penetration rate of intelligence will increase in the future.
Company: The chip product line continues to expand, and the market capacity expands to 2.5 times the current one. As the product matrix is gradually enriched, Lexin's goals will no longer be limited to the field of IoT devices. Other fields other than mobile devices will become new target markets for Lexin's Wi-Fi product line, and the market capacity will expand 2.5 times the current one. Furthermore, the company will continue to focus on the “processing+connection” product strategy, target multi-faceted AIoT SoC development, and actively explore new market fields such as high-speed digital transmission, Bluetooth, Thread, and high-performance SoC. In terms of AI, the company uses two development models. 1) High-end solution: ESP32-S3 can already connect with cloud AI applications such as OpenAI's ChatGPT or Baidu's “Wenxin Yime”. 2) Low-cost solution: The ESP32-S3 can achieve local applications such as image recognition, voice wake-up and recognition, and can be widely used in smart home devices; the new product ESP32-P4 also has edge AI functions. As AIoT develops and grows, the company's ecological advantages are expected to be further highlighted, bringing more diversified driving forces. Specifically, in combination with the content of a prosperous developer ecosystem, the development of generative AI technology lowers the learning threshold for company products, promotes the company's business development, and expands brand influence; cloud products bring business synergy effects, from only selling hardware to providing one-stop services for hardware, software, and cloud products.
Profit forecasting and investment advice
We believe that the company's 24H1 performance forecast is generally in line with performance expectations. As a leading company in the AIoT industry, Lexin has taken the lead in showing a strong performance recovery trend in this upward cycle. We expect the company to achieve net profit of 0.33/0.47/0.64 billion yuan in 2024-2026, corresponding to the current PE valuation of 35/24/18. Maintain a “buy” rating.
Risk warning
There is a risk that the consumer electronics recovery will not last as long as expected, the risk of market competition, the risk of technology renewal, and the risk that R&D progress falls short of expectations.