The company predicts a 34.1% year-on-year decline in profit in 2023

The company announced its performance report: 1) In 2023, the company achieved operating income of 20.063 billion yuan, -3.9% year-on-year; net profit to mother was 1,365 billion yuan, or -34.1%. 2) Corresponding to 4Q23, the company achieved operating income of 4.779 billion yuan, -3.3% YoY; net profit to mother was 304 million yuan, or -36.7% YoY. 3) The company's performance fell short of our expectations, mainly due to domestic demand for education and corporate interactive screens continuing to fall short of expectations, and increased market competition, which put pressure on profits.

Key points of interest

Domestic education and enterprise services are still under pressure, and new categories are being laid out to seek growth: 1) Domestic demand for interactive smart screens will continue to weaken in 2023. According to Lotu data, sales of interactive tablets in China were -14% year-on-year from 1-3Q23, with education tablets -9% year-on-year and enterprise tablets -24% year-on-year. 2) The education large screen business is affected by market competition, and profitability declined, which dragged down overall performance. In order to cope with the pressure on large screens, the company actively promoted the layout of supporting new products in the education sector, including educational PCs, recording and broadcasting, Sivo Rubik's Cube, etc. The revenue from the education business was -8.8% compared to the same period in 2023. 3) Enterprise services benefited from the growth of digital signage and audio and video products. In 2023, business revenue was +2% year-on-year, but we estimate that the interactive screen portion of these will decline year over year. 4) Demand for 2H23 weakened further compared to 1H23, and revenue from education and enterprise services was -14%/-3%, respectively. Looking ahead to 2024, we determine that market demand remains to be seen.

Overseas ODM business customers expanded smoothly and resumed rapid growth: 1) Benefiting from factors such as subsidy policies and demand for online education, the 2020-1H22 overseas smart interactive screen market experienced rapid growth, and domestic related enterprises benefited. In 2021/1H22, ViewSource's overseas revenue was +76%/+42% year-on-year. 2) The 2H22 market has entered a stage of high inventory levels after high growth, and adjustments in overseas brands' inventory removal have also led to a marked decline in orders from Chinese foundries. 2H22/1H23 Vision Source Overseas Revenue YoY -28%/-35%. 3) The company's products are competitive, and it is actively exploring overseas emerging markets and new customer resources in the downstream market. 2H23's overseas revenue was +38% year-on-year, and it has resumed a rapid growth trend.

Weak demand and increased competition have led to a decline in profits. Brands are actively planning to go overseas: 1) Since 4Q22, panel costs have continued to rise, and pressure on the company's cost side has gradually become apparent. 1Q23/2Q23/3Q23 gross margin was +2.7/-0.3/-4.7ppt, respectively. We expect 4Q23 gross margin to remain under pressure. 2) The company continues to expand overseas markets, promotes overseas education and corporate business under the Maxhub brand, and has reached cooperation agreements with various manufacturers such as Microsoft and Zoom. We expect overseas development to remain the company's key layout direction in the future.

Profit forecasting and valuation

Considering that domestic demand for education and enterprises is still biased and industry competition is intensifying, we lowered our profit forecast for 2023/2024/2025 by 8%/7% to 13.65/15.87/1,851 billion yuan. The current stock price corresponds to 15.1x/13.0x 2024e/2025e P/E. To maintain the outperforming industry rating, we simultaneously lowered our target by 10% to 45.0 yuan, corresponding to 19.9x/17.0x 2024e/2025e P/E, with 31% upside.

risks

Market competition increases risk; risk of overseas expansion falling short of expectations; risk of fluctuating raw material prices.