Performance: 24H1 performance exceeded market expectations, and gross margin increased significantly. 1) Net profit exceeded market expectations: 24H1's revenue was 11.247 billion yuan, +22.0% year over year; net profit was 0.537 billion yuan, surpassing Bloomberg's agreed forecast of about 9.4%, or +257.3% year over year. 2) Significant increase in gross margin: 24H1 gross profit margin of 21.5%, +7.4pct year-on-year, mainly due to the recovery of the mobile phone market, improved product portfolio, and continuous improvement in operational efficiency.

The market share of Android Acoustics is rising steadily, and the product portfolio continues to improve: 24H1 acoustics business revenue is 3.46 billion yuan, +4.1% year over year; gross margin is 29.9%, +4.4 pct year on year. Revenue and gross margin increased year-on-year, mainly due to a recovery in Android demand and an improvement in the product portfolio. The company expects gross acoustic margin to reach 35% for the whole year. 1) Shipments of high-end acoustic products have increased dramatically. The company's SLS master speakers maintained rapid growth, with shipments exceeding 12 million units, a year-on-year increase of nearly 200%. 2) Ultra-thin high-performance speakers meet the comprehensive size & performance requirements of folding machines.

After the acquisition of PSS, the synergy gradually became apparent, and the business diversified layout: On February 9, 2024, the company announced that it had completed the 80% share acquisition of Premium Sound Solutions (PSS), and reported 24H1 revenue of 1.522 billion yuan. 1) The automotive acoustics business goes hand in hand at home and abroad. The company exclusively supplied car speakers to a leading new car builder. Shipments exceeded one million in the first half of the year. In terms of overseas markets, the company has a high share of the world's first-tier car companies. 2) The company continues to deploy vertically integrated automotive acoustic service solutions, which are expected to have a synergy effect with PSS's high-performance car speaker products.

Optical gross margin is corrected, and product structure optimization+optical specification upgrades are expected to drive continued improvement in profitability:

24H1 optical business revenue was 2.21 billion yuan, +24.9%; gross profit margin was 4.7%, +21.7pct year over year, mainly due to: 1) the recovery of the smartphone optics industry; 2) the increase in the middle and high-end market share and improvement of ASP.

The company successfully promoted high-end optical products, with the goal of improving net profit in Q4 in a single quarter: 1) In terms of plastic lenses, 6P lenses accounted for more than 15% of shipments and were targeted for 7P plastic lens projects; 24H1 gross margin was close to 17%, and the company expects to exceed 25% in the second half of the year. 2) In terms of glass plastic hybrid lenses, 1G+6P glass plastic hybrid lenses shipped about 1.4 million pieces, an increase of nearly 40% over the previous year. WLG is expected to deliver more projects in 25 years. The company's exclusive WLG (wafer level glass) technology can achieve integrated die-casting process and ultra-high accuracy, and continue to promote more high-end projects with many customers to meet the innovative needs of customers for products such as main cameras and prisms. 3) In terms of optical modules, 24H1 revenue +29%, benefiting from a steady increase in shipments and ASP; OIS modules continue to break through new customers.

The gross margin of the precision structural parts business increased, and electromagnetic transmission grew across borders. 24H1 precision structural parts and electromagnetic transmission business revenue was 3.658 billion yuan, +1.1% year over year; gross profit margin was 22.9%, +3.6 pct year on year. 1) In terms of electromagnetic transmission, the company expects cumulative shipments of X-axis linear motors to exceed 1.9 billion units by the end of '24.

The industry's first innovative retractable lens VCM motor module was mass-produced and shipped. 2) In terms of metal frames, the company has become the main supplier of high-value structural parts for middle and high-end models and folding machines for core customers, and ASP and gross margin are steadily increasing; 3) In terms of pen motor cases, the new production capacity of the Yangzhou factory has begun to increase, and the share of overseas clients has steadily increased; 4) In terms of cooling, 24H1's revenue is +100% to 0.15 billion yuan, which is expected to benefit from the cooling demand of AI phones; 5) In terms of folding screen hinges, 24H1 shipped nearly 0.5 million units, for Honor Magic V3 and VS3 customizes “ultra-thin and light” sensing system solutions.

Profit forecast, valuation and rating: Taking into account: 1) PSS merger; 2) The progress of improving the profitability of the optical business exceeded expectations, and the 24/25 net profit forecast was raised by 16%/41% to 1.525/2.202 billion yuan, respectively, and an additional 26-year net profit forecast of 2.508 billion yuan. In view of the gradual implementation of improvements in the profitability of the optical business and the smooth growth logic of various business segments, it was raised to a “buy” rating.

Risk warning: Improvements in optical profitability have fallen short of expectations; WLG's project has fallen short of expectations.