Event: On August 22, 2023, the company released its 2023 semi-annual report. In the first half of 2023, the company achieved revenue of 5.170 billion yuan, a year-on-year decrease of 17.15%; net profit not attributable to parent was 323 million yuan, a year-on-year decrease of 27.25%.

Operators whose set-top box business is subject to short-term collection and delivery pace ahead of schedule, are full of orders and are expected to grow steadily.

In the first half of 2023, the company's smart terminal business achieved revenue of 3.77 billion dollars, a year-on-year decrease of 27.67% due to the pace of delivery by domestic operators and early collection in 2022. The company won the bid for the set-top box project, and there are plenty of orders in hand: the company's top foreign operators have won new bids and are gradually mass-produced; domestically, the company won the bid for China Mobile Group's 2023 smart set-top box product collection package, China Unicom's first gateway collection, and subsequent orders will be delivered steadily. Demand for 4K/8K upgrades at home and abroad is showing, and shipping charges are gradually declining. Combined with the competitive advantages of the company's large supply chain, the set-top box business is expected to contribute stable cash flow to the company.

It shows strong business growth, and the expansion of production lays the foundation for performance growth.

In the first half of 2023, the company's professional display business achieved revenue of 1,256 billion yuan, an increase of 40.93% over the previous year. Among them, the automotive display business is growing strongly, and has continuously obtained many star model display projects. The products are highly competitive, and will be delivered in accordance with the business plan in the second half of the year. In terms of automotive vehicle display systems, the company will build new automobile plants and related supporting facilities in the industrial park, purchase advanced automotive electronic product assembly lines, SMT production lines, etc., to meet production and quality requirements such as automotive-grade reliability, stability, and safety. It can expand the production capacity of the company's on-board human-computer interactive display assembly system and vehicle intelligent display instrument system, and lay the foundation for the company to increase its market share in the in-vehicle display business.

The advantages of VR self-development and self-production are obvious, and demand is yet to be increased.

The Skyworth XR team has full-stack R&D capabilities from hardware, optics, structure, ID, algorithms, software, systems, etc., to 3D modeling, Android/Unity/Unreal/Web/ drivers, etc. The hardware, optics, algorithms, and systems of the company's series of products are all developed by the company itself. They come from the company's own supply chain and manufacturing system, and the advantages of self-research are obvious. According to IDC's expectations, global AR/VR headset shipments are expected to increase by 14% in 2023, and are expected to accelerate between 2023-2027, with a compound growth rate of 32.6% in 2022-2027. Furthermore, technology giants such as Apple have left the market, leading the VR industry to develop positively, and the VR market is expected to usher in a high boom in the future.

Deploy AI in depth and cooperate with many leading companies.

The company has made corresponding arrangements in conjunction with AIGC, and the company's R&D center has set up a smart research institute to accumulate many differentiated AI application technologies. Overseas, the company has signed an enterprise-level service contract with Microsoft. The scope of services includes ChatGPT 3.5 and ChatGPT 4.0 commercial services, and the use of overseas cloud resources. At present, the company has developed an OTT box equipped with ChatGPT AI service software, and has continued internal testing, development, debugging, and upgrading, and plans to sell it on Europe's Strong overseas C-side channel. At home, the company has established close long-term cooperative relationships with giants such as Baidu, Huawei, Tencent, and iFLYTEK. The corresponding large-scale models have also been adapted and tested in house in the company's smart set-top boxes, projectors, and other products. At the same time, the company is already deployed on AI+AR, performing calculation and processing through boxes, NLP interaction and image presentation with AR glasses, etc. The company is actively embracing the wave of intelligence, developing new products to meet market demand, and is expected to fully benefit from the growing demand for AI intelligence.

Investment advice:

According to the company's public investor questions and answers, the share of winning bids and the number of contracts in the set-top box business, which is the company's main source of revenue, showed a sharp increase in the first half of the year, but due to slow customer pick-up and order placement, the pace of delivery of specific orders has slowed down, and most orders will gradually be delivered and revenue confirmed in the second half of the year. Furthermore, the company has made business transformation, customer open source, organizational structure and operating model adjustments in the mobile phone LCD module business segment, which lost money in the first half of the year, with the intention of stopping losses. Based on steady and good sustainable profitability such as smart set-top boxes and broadband network connection devices in the company's smart terminal sector, long-term and stable cooperative relationships with domestic and global overseas telecom operators, etc., and sufficient orders on hand and subsequent tenders and high demand, we expect the company's revenue from 2023 to 2025 to 138.9, 173.8, 22.06 billion yuan, and net profit of 1.02, 11.6 billion yuan, and 1.35 billion yuan respectively. The corresponding EPS is 0.88, 1.01 and 1.18 yuan respectively. Give 20 times PE in 2023, corresponding to a target price of 17.60 yuan for 6 months. Maintain a buy-A investment rating.

Risk warning: order delivery falls short of expectations; VR demand falls short of expectations; AIGC technology development and application falls short of expectations