Incident: 1H23's revenue was 5.477 billion yuan, down 22.8% year on year. As mobile phone camera module shipments fell 21.2% year on year; gross margin fell 1.9 pct to 3.4% year on year, due to: 1) the unit product manufacturing cost increased due to reduced capacity utilization; 2) the median price of RMB against the US dollar depreciated by about 3.8% from the beginning of the current period, causing material costs settled in US dollars to rise. Due to the decline in gross margin, the company's net profit margin fell 2.0pct to 0.4% year on year, corresponding to net profit of 20.802 million yuan, a sharp drop of 87% over the previous year.

Demand for 1H23 Android phones was weak, camera module ASP declined, and profitability pressure dragged down overall performance: due to weak demand for Android phones, 1H23 phone camera module shipments fell 21.2% year-on-year; during the period, mobile phone optics continued the slowing trend of specification upgrades. The company strategically focused on product specification improvements and voluntarily abandoned some low-end markets. The share of shipments of high-end camera modules of 32MP and above increased 8.9/5.3 pct to 37.1% year-on-year. ASP was still affected by a small increase in industry competition, with a 3. year-on-year decline. 4% In terms of profitability, the gross margin of the 1H23 camera module decreased by 2.1 pct year on year and increased by 1.0 pct to 3.6% month on month. The year-on-year decline was due to: 1) capacity utilization rate decline; 2) increase in material costs denominated in US dollars due to: 1) production line automation upgrades; 2) factory mergers further improved depreciation, water and electricity manufacturing cost amortization to reduce costs and increase efficiency.

Demand for 4Q23 Android phones may be at an inflection point of recovery. The company's product specification guidelines have been revised: in the context of consumer electronics inventory removal, according to Canalys, global smartphone inventory reached a relatively healthy level at the end of the 2nd quarter. Although 3Q still hasn't seen a significant recovery in mobile phone demand, based on: 1) Android flagship models will be released in 3Q and 4Q one after another; 2) mobile phone manufacturers are Double Eleven, Double 12, and potential restocking requirements for Spring Festival next year, 4Q23 Android phone demand may reach an inflection point of recovery. We expect the company's camera module shipments to pick up month-on-month and narrow the year-on-year decline. In terms of product specifications, the company revised the guidelines for the proportion of shipments of 32MP and above high-end camera modules for the full year 23 from 35% at the beginning of the year to 40%, based on: 1) penetration of high-spec products such as periscope, anti-shake, and large aperture is expected to increase; 2) the high-end market share will increase. Considering: 1) increased capacity utilization; 2) product structure optimization; 3) industry price competition tends to ease, we expect the gross margin of the 2H23 camera module to improve month-on-month.

Continuing to develop the automotive and IoT fields and establish long-term growth points: The company continues to make efforts in the automotive and IoT fields. The customer structure and product structure of the 1H23 vehicle module and IoT module have all improved greatly. Total shipments increased by 64.3% year-on-year (exceeding the 23 full-year growth rate guideline of more than 50%). Among them, vehicle module shipments increased by more than 100% year-on-year.

The company proposed in mid-'21 that IoT and vehicle camera module revenue will account for more than 25% of total camera module revenue in 25 years. 1) In terms of vehicle modules, the company is positioned as Tier-1.5, with products covering all ADAS/surround view/smart cockpit modules. Customers include: 1) internationally renowned tier-1 manufacturers such as mainland Germany; 2) Chinese new energy vehicle manufacturers such as BYD, Xiaopeng, and NIO. With the company receiving more project orders, the utilization rate of driving capacity continues to increase, and the revenue share of vehicle camera modules is expected to continue to increase, and profitability will accelerate improvement. 2) In the IoT field, the company's RGB see-through (see-through) and positioning (6 DOF) lens modules for VR headsets cover end customers such as PICO, HTC, and Dapeng, and is also collaborating on projects such as pancake lenses, dToF modules, and eye tracking modules.

Profit forecasts, valuations and ratings: In light of: 1) weak demand for Android phones and 2) the trend of mobile phone optical downsizing all exceeded previous expectations, the 23/24 net profit forecast was lowered by 74%/59% to 1.51/331 million yuan respectively, adding a 25-year net profit forecast of 473 million yuan. Considering: 1) 4Q23 Android phone demand may be at an inflection point of recovery; 2) IoT and in-vehicle modules are expected to establish long-term growth points and maintain the “increase in holdings” rating.

Risk warning: Android phone demand falls short of expectations; competition in the camera module industry intensifies; IoT and vehicle camera module business growth falls short of expectations.