The value of deep allocation is highlighted, and a steady recovery in fundamentals is expected to drive valuation restoration based on the expansion of operating expenses and the decline in government subsidies based on overseas business expansion. We lowered the company's net profit forecast for 2024-2025 from HK$0.59/0.67 billion to HK$0.35/0.5 billion, and added a net profit forecast of HK$0.64 billion for 2026, up -27.3%/43.8%/28.6% year on year, corresponding EPS of 0.44/0.63/0.81, respectively HKD. The current stock price of HK$4.28 corresponds to 9.8/6.8/5.3 times PE in 2024-2026 and 0.8 times PB in 2024, respectively. The company's book cash and equivalent of HK$3.94 billion is already slightly higher than the latest market value of HK$3.4 billion. The state-owned enterprise background benefits from the resource advantages of the parent company BOE Group. Cash flow from operating activities has improved. Along with the easing of price competition among domestic downstream car companies, mass production and delivery of the company's overseas customer projects is expected to drive the company's net profit back to growth in 2025-2026, and actively lay out system-level business to boost medium- to long-term prospects. It has deep allocation value. The upward inflection point of fundamentals is expected to drive valuation repair and upgrade to a “buy” rating.

The decline in 2024H1 net profit was due to cost expansion and government subsidies. Recurring net interest rates improved 2024H1 revenue of HK$6.157 billion year on year, up 18.18% year on year, benefiting from the expansion of its own market share and the rise in production capacity at the Chengdu factory. The 2024H1 gross profit margin of 6.38% was basically the same year on year, with a month-on-month decline. It was mainly affected by price adjustments, rising inventory costs, and employee, property, and depreciation costs during the period when production capacity in the Chengdu plant climbed. The company's net profit to mother was HK$0.171 billion, down 15.2% year on year. Operating expenses increased by 41.43% year on year due to overseas expansion, while government subsidies decreased by about 31 million yuan year on year. Excluding past clean-up and one-time effects, the company's 2024H1 gross margin was 11.4% compared to 2023H1 comparable gross profit margin of 9.1%, 2024H1 recurring net margin was 4.3% compared to 2023H1 comparable caliber 3.5%; 2024H1 operating cash flow was 0.8 billion yuan, a significant improvement compared to 2023H1's -0.38 billion yuan.

The competitive environment for domestic downstream car companies has gradually eased, and the increase in overseas customers is expected to drive net profit to return to growth. Under a comparable scale, the share of overseas revenue in 2024H1 will expand to 42% year-on-year from 40% in the full year of 2023, due to rapid revenue growth in the US and Japan. The automotive display module business is progressing smoothly overseas. The 2024H1 has received orders from Hyundai and Toyota in Japan, and high-value product cooperation has been reached with leading European and American customers. It is expected that gradual mass production and delivery will be achieved after the end of 2025. The company aims to increase the share of overseas revenue to 50% by 2027. The vehicle display system business is deeply tied to leading customers through vertical integration of resources and technical support. The company guided the system business revenue growth rate to exceed 100% in 2024.

Risk warning: Product launch is not as good as expected, production capacity and supply chain risks, and the growth rate of new energy vehicles is not as good as expected.