Core views

In the first half of 2024, the company's revenue and profit declined due to factors such as the intense competitive environment in the smart terminal market, overall demand falling short of expectations, and module business transformation. The company's various business development is expected to improve in the second half of 2024. The company won a large share of the procurement project of the domestic communication operator Gateway Group; set-top boxes maintained their leading edge and added two European top global operator customers overseas; the automotive display business grew rapidly, and revenue and gross margin continued to rise, and is expected to continue to expand in the next two years. In addition, the company is actively launching new A R/MR products, and is expected to achieve sales breakthroughs as the industry ecosystem continues to enrich.

occurrences

The company released its 2024 semi-annual report. In the first half of 2024, the company achieved operating income of 4.453 billion yuan, a year-on-year decrease of 13.87%; realized net profit of 0.182 billion yuan, a year-on-year decrease of 42.76%; gross margin of 14.51%, a year-on-year decrease of 2.13pct; and net cash flow from operating activities was 0.33 billion yuan, a decrease of 8.45% year on year.

Brief review

1. Performance declined in the first half of the year due to insufficient demand for smart terminals and a decline in gross margin of revenue from the mobile display module business.

In the first half of 2024, the company achieved operating income of 4.453 billion yuan, a year-on-year decrease of 13.87%; realized net profit of 0.182 billion yuan, a year-on-year decrease of 42.76%; gross margin was 14.51%, a year-on-year decrease of 2.13pct. Looking at a single quarter, 2024Q2 achieved revenue of 2.169 billion yuan, a year-on-year decrease of 23.28%; net profit to mother was 0.076 billion yuan, a year-on-year decrease of 62.24%.

The decline in the company's performance in the first half of the year was mainly due to a decline in revenue and profit from smart terminals and mobile phone modules. Among them, smart terminal business revenue was 3.294 billion yuan, a year-on-year decrease of 12.63%, gross profit margin of 16.34%, and a year-on-year decrease of 5.80pct, mainly affected by the competitive market environment. 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 gross profit orders; module business revenue was 0.288 billion yuan, a year-on-year decrease of 0.288 billion yuan, a year-on-year decrease 64.17%, mainly affected by factors such as intense competition in the industry. The company's module business is in a transition period. It is gradually canceling and abandoning orders for mobile phone display modules, and actively developing the industrial control module business. It will still take some time to accumulate. The revenue and gross margin of mobile display module business orders declined year-on-year in the first half of the year.

In terms of cost ratio, in the first half of 2024, the company's expense ratio was 12.31%, up 2.05 pct year on year, of which sales expenses increased 0.63 pct; management expenses increased 0.31 pct; R&D expenses remained flat year on year; and financial expenses increased 1.11 pct.

2. The domestic communication operator Gateway Group won 100% of the procurement projects, increasing its market share.

In January 2024, in the China Telecom Tianyi Gateway 4.0 (2023-2025) centralized procurement project, the company selected all four bids, with packages 1 to 4 ranked 6th, 7th, 3rd, and 6th respectively; in February 2024, the company won the bid for China Mobile's 2024-2025 smart home gateway product collection project with 18.15% share, totaling 13.76 million units. The four shares of the standard package 1 to standard package were 18.85% (first), 19.57% (second), and 18.85. 85 % (first), 15.94% (second); in April 2024, the company won second place in China Mobile's 2023-2024 smart enterprise integration gateway product collection project and successfully entered the China Mobile government and enterprise market, winning 22.22% of the bid. In June 2024, the company was successfully shortlisted for the FTTR single-source procurement project of China Mobile Terminal Company; FTTR market development has been achieved, and shipments have been achieved in important domestic provinces such as Henan, Guangdong, Jilin, and Liaoning. In the first half of 2024, the company's broadband connectivity business in Southeast Asia, Latin America, Europe and other places also achieved a certain amount of growth. With the further promotion and penetration of gigabit broadband in overseas countries in the future, the overseas broadband connection business is expected to continue to grow based on the company's accumulated resources and strategic partnerships with overseas operators and channels over the years.

3. Set-top boxes maintain their leading edge and add new overseas operator customers.

As a set-top box leader, the company continues to maintain its leading edge in domestic and overseas markets. The 8K UHD set-top box received exclusive standard packages from China Mobile's Henan and Hebei branches respectively; in June 2024, China Telecom's 20.32 million IPTV set-top box equipment (2024-2025) centralized procurement project, the company won the bid package 1 (4K set-top box) with the highest total value and second-place bid package 1 (4K set-top box), with a bid price of 0.896 billion yuan (excluding tax); it still has a stable share of the radio and television network set-top box market share in the Guangju TV industry First, the market share of IPTV set-top boxes has also continued to increase, and the share of shipments has further increased. In the first half of 2024, the company's set-top boxes added two of the world's top European operator customers to overseas markets; based on the European Cup and Olympics, the European retail business achieved positive growth, and the Southeast Asian and Latin American markets are also picking up. Furthermore, the company's smart box for somatosensory games with IPC cameras and AI computing power was the first to be sold in overseas markets, and the response was good.

4. The automotive display business grew rapidly, and new AR/MR products were released.

In the first half of 2024, the company's automotive intelligent automotive display business continued to obtain 18 key project targets from core customers, completed the production and sale of more than 0.5 million products, and achieved operating income of 0.689 billion yuan, an increase of 86.39% over the previous year, and gross margin continued to increase. Skyworth Auto Intelligence designed an ultra-wide 45-inch 8K unbounded smart screen for the Geely Galaxy E8. It is currently the largest single display assembly solution in mass-produced models in the world. As favorable policies such as car trade-ins, new energy vehicles going to the countryside, and vehicle road cloud integration continue to be implemented, and the automobile market's consumption potential is further unleashed, the company will continue to innovate, expand its product line customer base, and promote steady growth in the automotive electronic vehicle display assembly business.

At CES 2024, the company first exhibited Skyworth's new MR product PANCAKE 2. It uses a monocular 4K micro-OLED screen with 8K resolution, and supports binocular color perspective (RGB VST), gesture recognition interaction, eye tracking, and voice input technology. It is Skyworth's first monocular 4K binocular 8K MR product. It is also Skyworth's first monocular 4K MR product in the world other than Apple's Vision Pro. The company also released the first AR glasses, A1, which weighs less than 75g, and is equipped with a 1080P high-definition micro-OLED screen, reaching 54PPD resolution, 4496PPI, and 90Hz refresh rate. It presents users with a large 172-inch screen equivalent to 6 meters. The content is equipped with a portable smart terminal magic box, and has a Google TV ecosystem. The company's XR business is currently in an iterative period of industrialization. Pancake's ultra-short focus VR/MR all-in-one machine has significant R&D advantages, positioning the customized market for industry application solutions, the To-B operator market, and the To-C retail market. With the release of Apple Vision Pro, Meta Ray-Ban sales increase, AI+MR continues to improve user experience, and Meta is expected to release a new generation of AR glasses, the XR ecosystem continues to be rich, and we believe we are getting closer to the point where the XR industry explodes on the C side. With years of deep cultivation in the XR industry, the company is expected to seize the opportunity to achieve sales breakthroughs.

5. Profit prediction and investment advice.

In the first half of 2024, the company's revenue and profit declined due to factors such as the intense competitive environment in the smart terminal market, overall demand falling short of expectations, and module business transformation. The company's various business development is expected to improve in the second half of 2024. The company won a large share of the procurement project of the domestic communication operator Gateway Group; set-top boxes maintained their leading edge and added two European top global operator customers overseas; the automotive display business grew rapidly, and revenue and gross margin continued to increase, and is expected to continue to expand in the next two years. In addition, the company is actively launching new AR/MR products, and is expected to achieve sales breakthroughs as the industry ecosystem continues to enrich.

We expect the company's net profit to be 0.506, 0.631, 0.797 billion yuan in 2024-2026, corresponding PE of 26.6, 21.3, and 16.9X.

6. Risk warning.

Prices of raw materials have risen, prices of products with high import dependency such as switching chips and main control chips; set-top box shipments fall short of expectations; 4K and 8K penetration rates of domestic operators have slowed, competition in overseas markets has intensified, and gross margin has declined; gigabit broadband development falls short of expectations, and new entrants have led to increased market competition; early investment in AR/MR and other businesses is high, but large-scale shipments on the C-side are difficult in the short term, affecting the company's net profit; VR business development falls short of expectations, VR display and optical technology development falls short of expectations, new technology application costs are high, content ecology is scarce. The amount fell short of expectations, The competitive landscape of VR terminals deteriorated, gross margin declined; the recovery of consumer electronics fell short of expectations, and the profits of small and medium-sized modules continued to deteriorate.