The company's performance in the first half of the year exceeded expectations. 2024H1's revenue was RMB 11.25 billion, up 22% year over year.

Among them, revenue from acoustics/electromagnetic transmission and precision structural components/optics/PSS-automotive and consumer acoustics/sensors and semiconductor products was 34.6/36.6/2.21/1.52/0.39 billion, respectively, accounting for 31%/33%/20%/14%/3%. Benefiting from the recovery trend of the mobile phone market and the improvement of product portfolios in various divisions, the gross margin of each business increased significantly, driving the company's gross margin of 6.8 pct to 20.9% in the first half of the year, compounding the high gross profit margin of PSS related businesses. In the first half of the year, the company's overall gross margin, including PSS, increased 7.4 pct to 21.5% year-on-year. Net profit to the mother increased sharply by 257% year on year to 0.537 billion, exceeding our expectations. The net profit margin to the mother recorded 4.8%, an increase of 3.1 pct year on year.

The improvement in optical profitability surpassed expectations. 2024H1, the company's optical division's revenue increased 25% year-on-year to 2.2 billion, mainly due to the recovery in demand for mobile phone optics and the increase in the company's product specifications. Optical gross margin changed from -17% in the same period last year to a profit of 4.7%, exceeding our previous expectations that optical gross profit had just reversed losses. 1) In terms of optical modules, module revenue increased 29% year-on-year in the first half of the year, and high-end products such as OIS modules continued to break through new customers. Benefiting from increased shipments and ASP, the gross margin of optical modules increased by 11.8 pct to 5.7% year over year. 2) In terms of plastic lenses, the company's 6P lens shipment ratio remained above 15% in the first half of the year, and was designated for the 7P plastic lens project. Gross margin increased 27.4pct year-on-year to 16.7%, far exceeding expectations. 3) In terms of glass plastic hybrid lenses, 1G6P glass plastic hybrid lenses only shipped 1.4 million, an increase of nearly 40% over the previous year. Furthermore, the WLG process has product innovation requirements for integrated die casting, and it is expected to expand further applications in fields such as microprisms in the future.

The acoustic product portfolio continues to improve, and gross margins have increased significantly. 1) In terms of the original mobile phone acoustics business, the company's acoustic revenue increased 4.1% year-on-year to 3.5 billion in the first half of the year, mainly due to the recovery of the mobile phone market. The company's share in the middle and high-end market increased steadily in the first half of the year, and acoustic product specifications were upgraded: shipments of SLS master speakers increased 200% year-on-year to 12+ million units, the Combo series, an innovative acoustic and electromagnetic 2-in-1 product, shipped close to 450 units, and high-performance speakers with leading thinness in the industry were launched. Combined with economies of scale brought about by increased speaker shipments, the company's gross acoustic margin increased by 4.4 pct to 29.9% year-on-year in the first half of the year. 2) In terms of PSS-automotive and consumer acoustics product business, PSS consolidated revenue for the first half of the year was 1.52 billion, and gross margin was 25%. After the acquisition is completed, the company will also accelerate its expansion in the domestic middle and high-end NEV market. We believe that with in-vehicle acoustics as a starting point, the company has great potential in the automotive market in the future and is expected to create a new growth curve for in-vehicle terminals.

The structure of electromagnetic transmission products has been improved, and new structural parts are growing rapidly. In the first half of the year, revenue from the consolidated segment of electromagnetic transmission and precision structural parts increased 1% to 3.7 billion, and gross margin increased 3.6 pct to 22.9% year on year. Among them, gross margin of motors and precision structural parts improved by 3-6 pcts. 1) In terms of traditional electromagnetic business, the company continued to penetrate high-performance horizontal linear motors in the first half of the year, and the product structure was further improved. In the first half of the year, it also developed VCM with core mobile phone customers to achieve mass shipment of high-value VCM motor modules. 2) In terms of precision structural parts, the company's business of shafts, heat sinks, pen and motor cases is booming. In the first half of the year, nearly 0.5 million hinges were shipped, and revenue from cooling products increased by nearly 100% to 0.15 billion yuan over the same period last year. Furthermore, in terms of traditional metal frames, the company has become the main supplier of high-value structural parts for high-end models and folding machines for core customers, and ASP and gross margin have further increased.

Reiterate the “buy” rating. Considering that the company's profit improvement exceeded expectations, we appropriately raised our profit forecast. The company's revenue for 2024-2026 is 26.5/31.5/36.6 billion yuan, up 30%/19%/16% year on year; net profit to mother is 1.6/2.2/2.8 billion yuan, respectively, with a year-on-year growth rate of 111%/39%/27%. We raised our target price to HK$40, with a target market capitalization of HK$47.5 billion, corresponding to 20x 2025e P/E, and reaffirmed the “buy” rating.

Risk warning: the risk of improving the structure of optical products falling short of expectations, the risk that the recovery of the mobile phone market falls short of expectations, and the risk that the progress of new product development or mass production falls short of expectations.