Event: ArcSoft released its 2024Q3 quarterly report. Revenue for the first three quarters was $0.574 billion (+14.09%); net profit attributable to mother was 0.088 billion yuan (+8.12%); net profit not attributable to mother was 0.078 billion yuan (+3.51%). Among them, the revenue of mobile smart terminal vision solutions was 0.485 billion yuan (+6.54%), and the revenue of vision solutions for intelligent driving and IoT smart devices was 0.08 billion yuan (+108.32%).

Revenue slightly exceeded market expectations, and the automotive business grew significantly. The company's Q3 revenue was 0.193 billion yuan (+18.54%). Previously, we predicted an increase of about 15%, which slightly exceeded expectations. Among Q3 revenue, mobile smart terminal revenue was 0.153 billion yuan (+7%), and smart car revenue was 0.036 billion yuan (+130%). The high growth rate of the automobile business led to overall performance exceeding expectations. The Q1-Q3 gross profit margin was 90.49% (-0.72pct), mainly due to an increase in the relatively low share of automobile business revenue.

Profit fluctuations in a single quarter were mainly due to income tax changes. The company's Q3 operating profit was 30.5976 million yuan (+34.63%), and net profit to mother was 26.8318 million yuan (-15.14%). 23Q3 income tax - -9.0024 million yuan, 24Q3 was 3.7714 million yuan, a difference of nearly 13 million yuan, which explains the difference between operating profit and return to mother profit.

Payroll expenses have been rising steadily. The company's Q3 cash inflow was 0.228 billion yuan (+205%), leading the increase in cash inflows to revenue.

Actual salary expenses increased by 18%/15%/18%/13%, respectively, from 23Q4 to 24Q3. The company is still investing in various cutting-edge industries such as AI and intelligent driving 24 years later, and salary expenses are still growing.

Close cooperation with Qualcomm software and hardware is expected to drive continued growth in the mobile phone and automotive business. The company joined hands with Qualcomm to release next-generation imaging and end-side experiences: 1) Based on Qualcomm Snapdragon 8 Extreme hardware foundation and AIGC technology, released a joint research AI Pet Suite intelligent pet capture; 2) introduced AI video portrait lighting and video object removal, etc.; 3) Autonomous driving provides solutions such as integrated parking and automatic parking based on the Qualcomm Snapdragon 8155 and 8295, and launched external products such as environmental sensing systems and ADAS based on the 8650 and 8620 to meet L2+ level intelligent driving requirements.

AIGC is moving in a positive direction. The ArcMuse engine has obtained a large-scale model filing license from the State Internet Information Office, and AI commercial products have successively entered mainstream domestic and international e-commerce platforms such as Taobao Qianiu, 1688, Doudian, and TikTok.

Maintain an “Overweight” rating. Considering that the company's automobile overseas and AIGC business is still in the layout period, the short-term revenue contribution is limited. The revenue forecast for 2024-2026 was 0.84, 1.051, 1.232 billion yuan, and the original forecast was 0.862, 1.079, and 1.236 billion yuan. Considering the new AIGC business expansion in 2024 to increase R&D investment, the net profit forecast for 2024-2026 was reduced to 0.15, 0.261, 0.351 billion yuan. The original forecast was 0.198. 0.319 and 0.404 billion yuan, corresponding to PE 93, 54, and 40, respectively. Considering the company's steady smartphone business, the smart car and AIGC businesses are expected to open up incremental growth and maintain the “gain” rating in the future.

Risk warning: New product development falls short of expectations, and downstream customers are affected by macroeconomics to reduce their budgets.