Performance improved in the first half of '24, and Optics is expected to reverse losses by the end of the year

Positive performance in the first half of 2024: The company achieved revenue of 11.25 billion yuan (RMB, same below), up 22.0% year on year; gross margin was 21.5%, up 7.4 percentage points year on year; net profit of 0.54 billion yuan, up 257.3% year on year, exceeding market expectations, mainly benefiting from the recovery trend of the global smartphone market, as well as optimization of the acoustic, optical and precision structural component product portfolio, and the increase brought about by PSS. Looking ahead to the second half of '24, the smartphone market will enter the peak season for new models. The company will continue to invest in the IoT, AR/VR, and automotive fields and obtain relevant patents, etc. At the same time, PSS will help the company penetrate the global automotive industry. We are optimistic about the company's future development.

Mobile phone acoustics continues to upgrade regulations, and vehicle acoustics at home and abroad go hand in hand: the company's acoustics business achieved revenue of 3.46 billion yuan, up 4.1% year on year, gross margin of 29.9%, up 4.4 percentage points year on year, benefiting from high-end products; vehicle acoustics businesses such as PSS had revenue of 1.52 billion yuan, gross profit margin of 25.0%, and the synergy between PSS and the company gradually became apparent. We expect that the company's high-end acoustic products will continue to be introduced into the main models and domestic and foreign business revenue and profit contributions brought by PSS, and that the revenue and profit of acoustics will increase by a certain margin throughout '24.

The optical business is expected to reverse losses by the end of the year, and the gross profit of precision structural parts and other businesses: the optical business achieved revenue of 2.21 billion yuan, an increase of 24.9% over the previous year, thanks to the increase in the company's share of middle and high-end models, which brought about higher shipments and unit price improvements. The gross margin changed from negative to positive to 4.7%, an increase of 21.7 percentage points over the previous year. Among them, the gross margin of plastic lenses and optical modules both increased year over year. The company's share of 6P and above plastic lens shipments continued to increase, and new 7P targeted projects were obtained. WLG's process yield was continuously optimized, and shipments increased 40% year-on-year to 1.4 million. The company expects to reverse losses at the net profit level in Q4. The electromagnetic transmission and precision structural parts business achieved revenue of 3.66 billion, an increase of 1.1% year on year, and gross margin of 22.9%, up 3.6 percentage points year on year. The increase in revenue was mainly due to the continuous release of products such as high-end motors, heat dissipation, metal middle frames, and notebook motor cases. The sensor and semiconductor business revenue was 0.39 billion yuan, down 21.2% year on year, mainly due to the extension of new projects to the second half of the year. The gross profit margin was 16.4%, up 5.1 percentage points year on year, benefiting from the increase in the share of high gross profit revenue. We expect AI phones will drive the iteration of intelligent voice interaction technology and promote the upgrading of MEMS microphones.

The target price is HK$39.09, maintaining the buying rating: we forecast that the company's revenue for 2024-2026 will be $26.03 billion/ $29.24 billion/ RMB 32.99 billion; net profit will be $1.68 billion/ $2.13 billion/ 2.66 billion yuan, respectively. We gave the company 20 times PE in 2025, with a target price of HK$39.09. There is room for a 26.10% increase compared to the current price, and maintain the purchase rating