The medium and low pixel CIS is the global sales champion, and is determined to drive high-end ambition. The company is a leader in domestic CMOS image sensors and display driver products, and has been the global CIS sales champion for many years. In 2020/2021/2022, the company's CIS sales volume accounted for 30%/27%/26% of global CIS shipments, respectively. (1) Medium and high pixel phone CIS:

Starting in 2020, FAB-Lite will be transformed into a forward-looking layout, and plans to enter the high-resolution product market through production promotion research. The company is making full efforts to develop medium and high pixel mobile phone products. On June 9, it announced a draft restricted stock incentive. The performance assessment target is the revenue of products with specifications of 13M and above, with a target of 1.5 billion yuan for 2025. The company's 32M chip is the world's first single-chip 0.7 μm 32M CIS product. It has now been mass-produced and shipped, and 50M products are being shipped in samples. The company is confident that it will receive mass production orders this year, which is expected to open up a new cost-effective technology route outside the CIS chip stack.

(2) Non-mobile CIS: The company's products are mainly used in the security and automotive fields, and have covered the 1-8M pixel product line. In 2022, automotive CIS achieved rear-end market revenue of 200 million yuan, and is expected to quickly enter the automotive front-loading CIS market after completion of vehicle regulation certification. (3) Display driver: In 2022, the company's TDDI products with HD and FHD resolution have received orders from internationally renowned mobile phone brands. The company's high-end mobile phone CIS breakthrough+non-mobile CIS business expansion+TDDI product volume was tripled, and performance growth can be expected in the future.

CIS & DDIC: The main battlefield of mobile phones and the new curve of automobiles are progressing together, and domestic replacement of high-end models is taking place. (1) Mobile CIS: According to Counterpoint Research statistics, in 2022, mobile phones accounted for 71.40% of the revenue share of the CIS downstream market, making it the main battleground for CIS. Mobile phone CIS mainly benefits from increased usage of smartphone multi-camera solutions and increased demand for high-pixel materials for high-performance main cameras. According to statistics from Qunzhi Consulting, due to weak demand in the downstream smartphone market in 2022, the CIS price of 2M mobile phones has dropped 40% from 21Q4 to 23Q1. At present, CIS products with good prices and higher cost performance will be more competitive. (2) Automobile CIS: Automobiles are one of the few CIS downstream markets to achieve market share growth in 2022. Automobile CIS benefits from the penetration and iteration of automobile autonomous driving functions. According to ICV Tank's forecast, the automotive front-loading CIS market is expected to grow to US$5.131 billion by 2027. (3) DDIC: Mobile phones are the most important downstream market for DDIC for small and medium-sized panels. According to TrendForce's forecast, in 2022, the penetration rate of AMOLED panels in smartphone panels will be close to 50%. Frameless phones will drive demand for TDDI solutions. AMOLED display drivers and TDDI will become the two major increases in the DDIC market. (4) Domestic replacement of high-end models: Currently, the mobile phone CIS market is mainly monopolized by the two giants Sony and Samsung. The automobile CIS Ansemi is the largest supplier, and the penetration rate of high-end models of domestic manufacturers is low. From the perspective of supply chain safety and cost performance, domestic replacement of high-end models is imperative.

The results of the gorgeous transformation to FAB-Lite are impressive, and the sprint to high-end models can be expected to replace domestic products in the future. (1) Domestic breakthrough in high-end materials: The company successfully developed and mass-produced the world's first single-chip 0.7 μm 32M CIS product. This product uses a single-chip integrated solution. Unlike Sony's stackable high-pixel main camera products, the performance is comparable to 1.4 μm pixel size products, and the area is only 8% larger than the 32M stacked products on the market. At the same time, it has the advantages of high area cost performance ratio and low noise, which is expected to open up the high pixel CIS cost-effective technology route for domestic mobile phones. (2) The BSI production line of the self-built fab factory was successfully put into operation: On August 31, 2022, the company's “12-inch CIS Integrated Circuit Special Process R&D and Industrialization Project” BSI production line was successfully launched. The first wafer engineering batch yield was over 95%, a milestone in the company's transformation of FAB-Lite. In the later stages, the company's production capacity will gradually rise to 20,000 pieces/month. Subsequent factories will mainly undertake the production of the company's 32M and above products, and the company's production-promoting research will soon bear fruit. (3) Forward-looking supply chain management: Faced with the common inventory backlog problem in the industry in 2022, the company relied on countercyclical procurement and forward-looking judgment on the market. The fluctuations in inventory levels were significantly smaller compared to comparable companies in the same industry. As the CIS supplier with the largest shipment volume in the world, volume is king. The company's dominant position in the supply chain will help the company quickly seize the market at a lower price.

Investment suggestions: It is estimated that in 2023/2024/2025, the company will achieve operating income of 50.20/66.17/8.618 billion yuan and net profit of 1.30/3.21/690 billion yuan, 382/155/72 times the PE corresponding to the market value on November 2, respectively. Considering that the company's high-end products are progressing smoothly, and that the high depreciation brought about by the transformation of Fab-Lite puts some pressure on profit performance, we are optimistic about the potential for domestic replacement of high-end CIS products after the transformation of the company's Fab-Lite, cover it for the first time, and give the company a “buy” rating.

Risk warning: Downstream demand falls short of expectations, high-end products fall short of expectations, and market competition intensifies.