Event: On February 25, 2024, ArcSoft Technology released the 2023 Annual Results Report. In 2023, the company achieved operating income of 670 million yuan, an increase of 26.07% over the previous year; achieved net profit of 89.62 million yuan, an increase of 54.98% over the previous year; and realized net profit of 70.07 million yuan without return to mother, an increase of 928% over the previous year.

Comment:

Revenue recovered well throughout the year, and profit margins rebounded. The company achieved operating income of 167 million yuan in 4Q23, an increase of 18.5% over the previous year, in line with expectations; it achieved net profit of 7.96 million yuan, and profit growth slowed from the previous three quarters. The main reason for this may be that the company added 5.81 million yuan in accrued assets and credit impairment in the fourth quarter, which had a significant impact on profits. The company's profitability rebounded throughout the year, with a net profit margin of 13.36%, an increase of 2.49pct over the previous year. The main reason was that, on the one hand, the share of the automotive front assembly business increased, which led to an increase in overall gross margin; on the other hand, the scale of the company's revenue increased, and various expense ratios declined due to scale effects.

The mobile phone business has recovered, and mass production and delivery of the car-side business continues to advance. In 2023, the company's mobile smart terminal vision solutions achieved revenue of 581 million yuan, an increase of 22.82% over the previous year. On the one hand, there was a rebound in global smartphone market shipments. According to Canalys, 4Q23 global smartphone shipments reached 320 million units, an increase of 8% over the previous year; on the other hand, the continuous mass production and shipment of the company's intelligent superdomain TurboFusion led to an increase in stand-alone value. It is expected that in 2024, the company will still benefit from the upward trend in smartphone shipments and the penetration of Turbo Fusion into the lower-middle range market. The company's intelligent driving and other IoT smart device vision solutions achieved revenue of 74.294 million yuan, an increase of 67.26% over the previous year. In-vehicle interior and exterior products have been mass-produced and delivered in a number of models. It is expected that the increase in the targeted volume of the vehicle side business and the continued promotion of mass production delivery will still be the biggest driving force for growth in 2024.

ArcSoft's smart commercial products will soon launch new features such as video generation. On February 19, Hongsoft's WeChat account was released. The ArcMuse computing engine at the bottom of the AI commercial product added the ability to generate video. The model is based on the diffusion-transformer technology architecture and is refined for commercial scenarios. It can transform static product images and flat model images into dynamic commercial videos of about 20s, and it is expected that it will gradually be opened to the public in the future. Furthermore, the app and applet versions of the ArcSoft AI commercial products are about to be released, and it is expected that they will enter the large-scale promotion stage. It is recommended to pay attention to their commercialization.

Investment advice: Maintain an increase in holdings rating. From 2023 to 2025, the company is expected to achieve revenue of 6.70/8.35/1,011 million yuan, an increase of 26.1%/24.7%/21.0% year-on-year; net profit to mother of 0.90/1.64/238 million yuan, an increase of 55.0%/83.6%/44.5% year-on-year.

Risk warning: The development and promotion of smart commercial products fell short of expectations; the recovery of smartphone shipments fell short of expectations; and the targeted implementation of the car-end business fell short of expectations.