Matters:

On August 24, 2024, Skyworth Digital released its 2024 semi-annual report. The company achieved operating income of 4.453 billion yuan (YoY -13.87%) and net profit to mother of 0.182 billion yuan (YoY -42.76%) in the first half of 2024. On a quarterly basis, 2024Q2 achieved revenue of 2.17 billion yuan (YoY -23.28%, QoQ -5%) and net profit to mother of 0.076 billion yuan (YoY -62.47%, QoQ -28.78%).

Commentary:

Demand for the smart terminal business fell short of expectations & prices fell, and the company voluntarily abandoned the negative gross profit business. The company's smart terminal business achieved revenue of 3.294 billion yuan (YoY -12.63%) in the first half of 2024, accounting for 73.97% of revenue. Affected by market competition, the prices of set-top boxes and broadband gateway products continued to drop. Market demand fell short of expectations due to insufficient consumption power. At the same time, based on avoiding vicious price competition, the company voluntarily abandoned some negative margin orders. (1) In terms of digital smart set-top boxes, the company's 8K ultra-high-definition set-top boxes received exclusive packages from China Mobile's Henan and Hebei branches respectively, and won the bid with the highest total value in China Telecom's IPTV set-top box collection project in June. Furthermore, it still has the highest market share of radio and television set-top boxes. In terms of overseas business, the company added two top European operator customers to its set-top box in the first half of the year, and the European business also benefited from the growth of the European Cup and Olympics. In addition, the company has also made major breakthroughs in its smart box and cloud computer business. (2) In terms of integrated terminals and broadband connectivity services, the company won 100% of the domestic operator gateway procurement in the first half of the year. In February, the company won the bid for China Mobile's 2024-2025 smart home gateway product collection project with the first place. Furthermore, it achieved a certain amount of growth in many overseas regions. With the further promotion and penetration of global gigabit broadband in the future, the company has accumulated overseas resources and partnerships over the years to continue to help the development of overseas broadband business.

The automotive display business continued to expand its market share, and industrial control modules achieved significant growth. In the first half of 2024, the company's professional display business achieved revenue of 0.98 billion yuan (YoY -21.94%). (1) In the automotive electronic vehicle display assembly business, the company received 18 key project targets from core customers in the first half of the year, sold more than 0.5 million sets of products, and achieved revenue of 0.689 billion yuan (YoY +86.39%). In recent years, in-vehicle display systems have gradually become a core component of the human-vehicle experience. The company's products already have strong competitiveness in the market, have obtained targets for display assembly projects for several star models, continue to cultivate new projects of existing designated brand car manufacturers, and expand their market share. (2) In terms of mobile phone displays and industrial control modules, the company's module business revenue in the first half of the year was 0.288 billion yuan (YoY -64.17%). The main reason was that the company gradually abandoned the mobile display module business due to fierce competition and actively developed the industrial control module business. Although industrial control modules achieved significant growth in the first half of the year, there was still a significant negative impact on the overall module business due to the year-on-year decline in mobile display module orders and gross margin.

The XR field has significant R&D advantages and is expected to create a new growth curve. In January '24, the company released PANCAKE2, the world's first single-lens 4K MR product other than Apple's Vision Pro and the first domestic single-lens 4K MR product. It also launched the first ultra-clear, ultra-lightweight AR glasses equipped with a Micro OLED screen, and a portable smart terminal magic box to provide a rich content ecosystem. In addition, the company's AI glasses are also being developed, which are expected to benefit the growth of the industry.

Investment advice: Skyworth Digital is the global leader in set-top boxes and broadband connectivity devices. The set-top box and broadband connectivity equipment business maintains its leading edge, and continues to expand the XR and automotive business. Demand suffered a brief setback due to economic pressure. We expect the company's net profit to be 0.776/0.934/1.126 billion yuan in 24-26 years. Referring to comparable company valuations, the company was given 20 times PE in 2024, with a target share price of 13.4 yuan, and a “recommended” rating.

Risk warning: terminal demand falls short of expectations, XR industry development falls short of expectations