Incident: 2024H1, the company achieved revenue of 4.45 billion yuan, a year-on-year decrease of 13.9%; net profit to mother was 0.18 billion yuan, a year-on-year decrease of 42.8%. With 2024Q2, the company achieved revenue of 2.17 billion yuan, a year-on-year decrease of 23.3%; net profit to mother was 0.08 billion yuan, a year-on-year decrease of 62.2%.

Macro factors such as low demand and market competition limit the growth of the smart terminal business, and the company is actively expanding the market to cope with changes. 2024H1, the smart terminal business achieved operating income of 3.29 billion yuan, a year-on-year decrease of 12.6%, gross profit margin of 16.3%, and -5.8pct year over year. Mainly due to market competition, prices fell and demand was insufficient, and the company voluntarily abandoned some negative gross profit orders.

1) In the set-top box business, the company broke through the 8K UHD set-top box project and received exclusive orders from Henan, Hebei, etc. The number of contract orders from key overseas strategic customers and markets in Europe, Southeast Asia, Latin America, Australia and other markets is also growing actively;

2) In the broadband connection business, the company won 100% of the procurement projects of Gateway Group in the domestic communication operator market, increasing its market share;

3) XR business. The company launched a new generation of Pancake MR products, the first AR glasses, XR series product development and a new generation of reserve upgrades.

Automobile display is progressing quite well, and the results of the industrial control module business reform can be expected. 2024H1, the professional display business achieved revenue of 0.98 billion yuan, a year-on-year decrease of 21.9%, a gross profit margin of 6.8%, and a year-on-year increase of 7.7 pcts. It was mainly due to the company's abandonment of mobile display modules, which led to a decline in revenue during the transition period.

1) Automobile display revenue was 0.69 billion yuan, +86.4% year over year. The company obtained 18 key project targets from core customers, completed the production and sale of more than 0.5 million sets of products, and achieved revenue of 0.689 billion yuan in the first half of the year, an increase of 86.39% over the previous year.

2) Other modules achieved revenue of 0.29 billion yuan, or -64.2% over the same period. The main reason was that the company abandoned fiercely competitive products in the mobile phone display module industry and transformed and actively developed industrial control modules. We believe that, on the one hand, as favorable policies such as car trade-in, new energy vehicles going to the countryside, and vehicle road cloud integration continue to be implemented, the company's designated models continue to accumulate, and the automotive electronic vehicle display assembly business is growing steadily; on the other hand, with the gradual transformation of small and medium-sized modules, the revenue and gross margin of the industrial control module business is also expected to begin to recover.

Profit forecast and investment rating: We believe demand for set-top boxes and broadband connectivity products is expected to recover after bottoming out, and automotive and XR products will contribute to the company's performance growth one by one. Considering that demand is still in the low range, the company's net profit for 2024/2025/2026 was adjusted from 0.8/0.95/1.11 billion yuan to 0.63/0.74/0.94 billion yuan, and PE corresponding to the closing price on August 28, 2024 was 21.2/18.1/14.4 times, respectively, maintaining the “buy” rating.

Risk warning: Order delivery falls short of expectations, overseas expansion falls short of expectations, VR industry development falls short of expectations, supply chain risks