Key points of investment

Incident: The company released its results report for the third quarter of 2024. The company achieved operating income of 16.162 billion yuan, up 27.39% year on year; net profit to mother was 1.373 billion yuan, up 7.93% year on year; non-net profit withheld from mother was 1.311 billion yuan, up 17.28% year on year. Among them, net profit to mother was 0.462 billion yuan in the single third quarter, a decrease of 14.08% year on year, after deducting net profit of 0.452 billion yuan. The ratio decreased by 7.85%.

The smart terminal sector has maintained steady growth, but weak industry demand and increased competition are undisputed realities

The company achieved revenue of 6.642 billion yuan in the third quarter, an increase of 34.15% year on year. This was mainly due to the continued growth of the TV ODM business, benefiting from continued growth in North America's peak season preparation demand. In the third quarter, the company's TV ODM shipments reached 4.4 million units (according to Lotu Technology data), an increase of 42% over the previous year, and smart display terminal shipments ranked second in the industry. In the face of weak demand, competition in the industry intensified. Comparable companies such as Kangguan Technology and Hisense Video experienced a decline in gross margin and net interest rate levels in the first half of '24. The company continues to be deeply involved in overseas markets, mainly in North America. As an important ODM partner such as Roku, the leading TV content platform in North America, and the channel brand ONN, the company's ODM business has fully benefited from the increase in customer market share. Under this weak demand, the company was able to achieve an increase in shipment volume and revenue, which has proven that the company is not only a “manufacturing cost master” in the television field, but is also ahead of industry competitors in fields such as industry judgment and technology research and development. Faced with global trade difficulties, the company mainly dealt with it through local cooperative factories and the establishment of overseas production bases. In particular, the gradual development of manufacturing bases in Vietnam provided flexible operating space for the company to continue to develop overseas incremental markets such as Europe and South America. In addition, the company will also actively develop various types of terminal businesses such as displays, so the smart terminal business is the most solid basic market for steady growth.

LED chips maintain industry leadership, and the packaging sector actively seeks changes in a weak industry context and actively explores new growth paths

As one of the company's important cash flow businesses, the LED chip business continues to maintain a leading position in the industry and a stable profit level. The report shows that the company's total LED chip output is 1.1 million chips/month, with gallium nitride chip output having an absolute advantage, reaching 1.05 million chips/month (all 4 inch pieces), ranking first in the industry in production and sales, and the output of gallium arsenide chips is 0.05 million wafers per month (4 inch chips). At the same time, the company has significant cost advantages and industry competitiveness in the LED chip field, and with the continuous upgrading of the product structure, the company's profitability has further improved.

Demand in the LED packaging industry is still weak: 1) The lighting sector, due to the weak global economy and a marked slowdown in investment in the real estate market, where demand for general terminal LED lighting has not recovered well; 2) Despite a weak recovery trend in the backlight sector, overall shipments are still low: 3) Direct display sector, affected by macroeconomic fluctuations and other factors. Domestic demand for LED direct display has been sluggish since 24 years. According to data from Luotu Technology, 24H1 small-pitch LED display in mainland China Same Ratio -9%/+5%. Under weak industry demand, the performance of most LED packaging companies was under pressure. For example, Guoxing Optoelectronics's 24Q3 net profit fell 61.55% year on year to 0.01 billion yuan, net sales margin was only 1.6%, Hongli Zhihui 24H1 net profit fell 34% year on year to 0.08 billion yuan, and Mulinsen 24Q2's net sales margin was only 2.05%. Faced with pressure from the demand side of the industry, the company is actively seeking change, and has been changing the product structure to open up space for high-technology content and high-margin varieties. For example, in the context of the growing demand in the Mini LED market, the company has developed various technology paths such as COB, POB, MPOB, and Mini Lens, and has successfully developed customers for many leading TV brands at home and abroad. Compared with peers, the company has a leading market position in LED chips, so with the length and depth of industrial chain coverage, the company has an advantage in actively seeking change and exploring new growth paths. Currently, the company deeply collaborates the packaging business with the upstream chip business to promote product performance optimization and cost reduction through technological innovation and upgrading. The growth of the company's packaging business after completing the integration of the industrial chain is worth looking forward to.

Mini/Micro COB shows that shipments continue to rise, and high-definition displays are still an important racetrack for the company to pay attention to

In a situation where overall LED directly shows weak market demand, the COB penetration rate increased rapidly, the application process accelerated significantly, and applications continued to sink. 24H1 COB sales increased by more than 100% year on year, and sales increased 70% year on year (according to DiXian data). As a leader in COB display technology innovation, the company accounts for more than 50% of the COB industry. The interim report shows that the company already has a COB production capacity of 0.016 million square meters/month, and will continue to add new production lines. Shipments continue to rise, and the penetration rate of the company's newly launched P1.56 point spacing products is rapidly increasing. Furthermore, in terms of B/C-side application progress, the company was selected as an outsourcing supplier for Samsung's MicroLED product line, which also shows that the quality level and industry position of the company's miniLED direct display products have been fully recognized by customers. The MiniLED direct display segment continues to be the core driving force for the company's growth.

Fluctuations in the US dollar exchange rate and the development of new business fields caused certain profits and losses, which were also the main factors affecting Q3 profits

In the third quarter, the company's gross margin fell 3.3 pcts to 14.38% year on year. At the same time, the company's calculated asset impairment losses reached 75.8 million yuan, a significant increase compared to 47.05 million yuan in Q23. This is mainly due to the company's adjustments to some underprofitable businesses and newly developed businesses. As the company's traditional business segment, networking has multiple product lines such as set-top boxes, routers, gateways, smart door locks, and home care cameras. Facing sluggish market demand and a fierce competitive environment, networking business profits are under pressure. In terms of developing new businesses, in 2023, the company successfully acquired Guangdong Ruigu and the optical module team to complete the vertical integration of devices and modules in the optical communication field. Zhaochi Ruigu is mainly engaged in the R&D, production and sale of optical devices and optical modules for optical fiber signal transmission, reception and photoelectric conversion in the field of optical communication devices. Leading customers have the highest market share in the industry, but in the early stages of new business development, the company still needed a certain amount of time to integrate its business, which caused certain profits and losses. In addition, exchange gains and losses due to fluctuations in the US dollar exchange rate also have a certain impact on the company's current futures net profit, but currently the company has taken effective measures to deal with exchange rate fluctuations, and the impact is basically manageable.

Profit forecast: The company's revenue for 2024-2026 is estimated to be 21.8, 26.2, and 31.2 billion yuan, respectively, and net profit to mother is 1.825, 2.3, and 2.848 billion yuan, respectively. The corresponding PE is 13.12, 10.41, and 8.41 times, respectively. Considering that some of the company's businesses are in the consolidation period and industry demand is still recovering, it was lowered to an “increase” rating.

Risk warning: The TV terminal ODM industry experienced a decline in demand; COB directly showed that penetration and growth fell short of expectations; new business development fell short of expectations.