Key investment points

High-end acoustics platforms continue to introduce major models, and the product portfolio continues to improve. In the first half of 2024, the Group's acoustics business achieved revenue of RMB 3.46 billion, an increase of 4.1% year-on-year, mainly due to the recovery of the global smartphone market in the first half of the year, and shipments returned to a growth trajectory. Benefiting from the Group's high-end acoustic platform, the continuous introduction of major models and increased speaker shipments, the gross margin was 29.9%, an increase of 4.4 percentage points over the previous year. In the first half of 2024, the smartphone market continued its recovery trend in the second half of 2023. According to the latest statistics from the International Data Corporation (IDC), global smartphone shipments achieved a 10.4% year-on-year increase in the first half of this year. Thanks to years of technological innovation, the Group's acoustics business integrates hardware, algorithms and tuning services to meet the application needs of smart devices in multiple scenarios, leading the continuous upgrading of the acoustic industry. In the first half of 2024, the Group's share in the middle and high-end market increased steadily, and its product portfolio continued to improve. For example, SLS master speakers maintained a rapid growth trend, with shipments exceeding 12 million units, an increase of nearly 200% over the previous year. The Combo series, an innovative acoustic and electromagnetic 2-in-1 product, shipped nearly 4.5 million, providing customers with rich product solutions. In terms of folding machines, the Group launched high-performance speakers with the highest thinness in the industry. Using the Group's high-performance speaker platform and innovative material application and structural design, the Group not only greatly saves in-flight stacking space, but also enhances the speaker's medium and low frequency performance, achieving a perfect balance between lightness and performance, helping the Group's acoustic products gain a major share in the folding models of many customers.

The synergy between PSS's automotive and consumer acoustics products business and the Group is gradually showing. The consolidated revenue for PSS related businesses was RMB 1.52 billion and gross margin was 25.0%. The Group's automotive acoustics business continued to break through, and the synergy between PSS and the Group gradually became apparent. The future of the booming automotive market is outlining the second growth curve for the Group. PSS's product portfolio covers high-performance classic car speakers with different specifications, such as low, medium, and full range. With cutting-edge tuning technology, PSS can provide consumers with a high-quality experience, and PSS is still actively expanding its share in the world's first-tier car companies. According to data from the China Association of Automobile Manufacturers, domestic automobile sales increased 6.1% year on year in the first half of 2024, with sales of new energy vehicles growing rapidly by about 32% year on year. After the acquisition is completed, the Group will also accelerate its expansion in the domestic market and continue to supply mid-range and high-end models from leading new energy companies. The Group has been exploring vertically integrated solutions integrating speakers, amplifiers, algorithms and tuning services, as well as strong alliances with the world's top audio brands through a brand licensing model to provide more diverse choices for the world's leading car companies and end users.

The recovery in demand in the smartphone optics industry compounded the Group's increase in the medium to high specification market share, and the optical business grew significantly. In the first half of 2024, the Group's optical business achieved revenue of RMB 2.21 billion, an increase of 24.9% over the previous year, mainly due to higher shipments and unit price improvements brought about by the recovery in demand in the smartphone optics industry and the increase in the Group's share in the medium to high specification market. The gross margin improved to 4.7%, a significant increase of 21.7 percentage points over the same period last year. Among them, the gross margin of plastic lenses increased 27.4 percentage points to 16.7% year over year, and the gross margin of optical modules increased 11.8 percentage points to 5.7% year over year. During the reporting period, the Group's optical technology continued to be upgraded and the product structure was continuously optimized. High-end plastic lenses are progressing smoothly. 6P lenses have maintained a share of over 15% in shipments, and have been selected for the 7P plastic lens project. In terms of optical modules, revenue increased 29% year-on-year in the first half of the year, benefiting from a steady increase in shipment volume and unit price. In the first half of 2024, only 1.4 million 1G6P glass plastic hybrid lenses were shipped, an increase of nearly 40% over the previous year. The outstanding performance brought by the Group's exclusive WLG process has received positive feedback from smartphone manufacturers. This process has the unique advantage of integrated die casting, which can greatly improve the production efficiency and accuracy of microprisms. In order to meet the customer's product innovation needs for main camera, telephoto and prism, the Group actively cooperates with customers to pre-research more high-end and flagship projects. At the same time, the Group attaches importance to inventory management, improving operational efficiency and production yield, further optimizing unit costs, and significantly increasing gross margin.

High-end motor products continue to be released, and the Group continuously optimizes the product structure of precision structural parts. In the electromagnetic transmission and precision structural parts business, in the first half of 2024, the consolidated segment's revenue was RMB 3.66 billion, an increase of 1.1% over the previous year. The gross revenue margin of the consolidated division was 22.9%, up 3.6 percentage points from the previous year. The gross margin of the motor and precision structural parts business both improved by 3-6 percentage points, mainly due to the continuous release of high-end motor products and the Group's continuous optimization of the precision structural parts product structure, and emphasis on cost control. The volume of structural components such as hinges, heat dissipation, and pen motor cases is an important driving force for future growth.

Thanks to the Group's high-performance horizontal linear motors and product portfolio improvements, the gross margin of the electromagnetic drive business increased significantly. The gross margin of the electromagnetic transmission business increased significantly in the first half of 2024, mainly due to improvements in the Group's high-performance horizontal linear motors and product portfolio.

Furthermore, RichTap? It has been recognized by many customers for its industry-leading algorithms and professional services. At the same time, the Group's motor products continue to develop in the fields of games, AR/VR, smart cars, and IoT, empowering equipment manufacturers and content providers such as games, videos, and social interaction to achieve multi-dimensional and high-quality tactile feedback experiences. The Group promotes vertical integration of optical modules and accelerates the development of the VCM (Voice Coil Motor) business. The manufacturing side has achieved full self-manufacture of key components to provide customers with overall solutions for design, simulation, manufacturing and testing. Relying on technological leadership and production technology accumulated over many years, the Group developed with core mobile phone customers in the first half of this year to achieve mass shipment of high-value VCM motor modules.

The precision structural parts business continues to release multiple products. In the precision structural parts business, the Group's steady customer relationships with many core customers helped increase revenue for many products, such as the hinges, heat sinks, and pen case businesses, and also helped increase gross margin in the first half of this year. The Group continues to expand its metal frame business, actively cooperating with customers to develop emerging categories, and has become the main supplier of high-value structural parts for high-end models and folding machines for core customers. The unit price level and gross margin have further increased. With its ability to vertically integrate hinge products from design to finished product assembly and technological innovation, the Group was highly recognized by customers, and shipped nearly 0.5 million units in the first half of 2024. The folding screen hinge solution innovatively developed by the Group can achieve the ultimate ultra-thin thickness, greatly improve impact resistance, and set an industry benchmark for hinge technology upgrades. In the first half of 2024, revenue from cooling products increased by nearly 100% year-on-year to 0.15 billion yuan. Benefiting from scale effects and lean cost control, gross margin has also increased steadily. In addition, the market share of the Group's laptop case business among overseas customers has also grown steadily, thanks to new production capacity in Yangzhou.

With AI Dongfeng, smartphone MEMS microphones have great potential. In the first half of 2024, revenue from the sensor and semiconductor business was RMB 0.389 billion, down 21.2% year-on-year, mainly due to the extension of new projects to the second half of 2024. The gross margin was 16.4%, up 5.1 percentage points from the previous year, mainly due to the increase in the share of revenue from high-margin products. As one of the top three global smartphone MEMS microphone manufacturers, the Group has shipped over 7 billion units so far. With independent development capabilities, the Group focuses on developing high-performance MEMS microphones, ASICs (Application-Specific Integrated Circuits) and customized microphone modules for customers, which can better meet the needs of many industries and customers. In the first half of 2024, the Group continued to promote self-developed high-performance MEMS microphones. The proportion of high-value products shipped on Android devices increased by about 15 percentage points to more than 60% over the previous year, and continued to lead the industry to upgrade to the middle and high-end.

The current wave of AI is surging, and strong demand for AI phones will drive rapid iteration of intelligent voice interaction technology, and MEMS microphones, as the core device for voice recognition, will also lead specification upgrades. As one of the first players in the industry to deploy high signal-to-noise ratio microphones and achieve large-scale mass production, the Group has won wide recognition for its outstanding product performance, and is expected to continue to create impressive increases with AI Dongfeng in the future. In the future, terminal AI will accelerate implementation and innovation in human-computer interaction methods, which is expected to drive a new switching cycle in the consumer electronics industry. The Group's mission is to create the ultimate experience, focus on technological innovation, and strengthen its position as a global leader in perceptual experience solutions through interdisciplinary product development.

l Investment advice

We expect the company to achieve revenue of 26/29.2/33 billion yuan in 2024/2025/2026, and realized net profit of 1.7/2.2/2.7 billion yuan respectively. The current stock price corresponding to 2024-2026 PE is 24 times, 18 times, and 15 times, respectively, covered for the first time, giving it a “buy” rating.

l Risk warning

Risks relating to the smartphone market, risk of dependency on certain major customers, risk of production interruption due to unforeseen events and supply chain difficulties, risk of obsolescence of operation, technology and environmental, social and governance considerations, liquidity and interest rate risk, foreign exchange risk, and risk of global trade friction.