A rapidly growing domestic display control system leader. 1) The company was founded in 2012. Its main business is to use video processing algorithms as the core and hardware equipment as the carrier to provide customers with comprehensive solutions in the video image field. It is in a leading position in the domestic industry. Carlet products are widely used in various video image display fields such as festivals, competitions, and conference events around the world. 2) In 2022, the company achieved operating income of 679 million yuan, an increase of 16.62% over the previous year, and net profit of 131 million yuan to mother, an increase of 22.11% over the previous year. In the third quarter of 2023, the company achieved operating income of 215 million yuan, a year-on-year increase of 39.85%, and net profit to mother of 40 million yuan, an increase of 68.66% over the previous year.

3) The company's three main businesses include LED display control systems, video processing equipment, and cloud networking players. Among them, video processing equipment has driven significant business growth with technological iteration, and has gradually become a revenue source in the same position as LED display control systems. 4) In 2022, the company dug deeper into overseas customers, increased the construction of overseas marketing networks, and achieved overseas revenue of 70.1467 million yuan, an increase of 45.12% over the previous year.

The penetration rate of small-pitch LEDs continues to increase, driving the market boom in display control systems and video processing equipment. In 2020, the overall market size of LED displays in China was 53.2 billion yuan, a year-on-year decrease of 19.3%. It increased to 63.5 billion yuan in 2022, and the market size is expected to reach 68.4 billion yuan in 2023. The scale continues to increase and grow steadily. The rich downstream ecological scenario of the industrial chain provides broad space. Under the premise that strong semiconductor chip technology is driving down chip prices, small-pitch LEDs are gradually becoming mainstream. The continuous increase in the penetration rate of small-pitch LEDs requires downstream equipment with more sophisticated display control systems and video processing equipment, thus driving market demand in the midstream segment of the industry chain. The market concentration is relatively high, and Nova Nebula and Carlette are leading domestic manufacturers. In 2021, the domestic LED display control system market size was about 2.3 billion yuan, of which the two leading manufacturers Carlette and Nova Nebula together accounted for more than half of the share, and the industry concentration was high. Thanks to their scale advantages and the continuous expansion of customer networks, leading companies have sufficient resources in the supply of raw materials and can respond quickly to customer needs.

Customer stickiness and learning costs bring natural barriers, and overseas market expansion brings continuous growth. 1) In the application of display control systems, hardware equipment usually needs to be used in combination with software and has a high level of complexity. Customers need specialized training and a long period of practical use to master it. Therefore, downstream customers are prone to strong stickiness, supplier conversion costs are high, and once a cooperative relationship between downstream customers and display control system manufacturers is established, it will remain stable for a long period of time. 2) The company has built a stable downstream moat through cooperation with leading major customers. For example, the minimum preferential price clause was agreed upon in the procurement agreement signed between the company and Power Big Lottery. The main contents include priority supply to Power Big Lottery, and the lowest preferential price for transaction volume and product specifications.

Covered for the first time, a “gain” rating was given. We expect the company's 2023E/24E/25E revenue to reach 1,040/15.69/2,354 million yuan, and net profit to mother to reach 200/3.02/468 million yuan, respectively. Considering that the company is a leader in LED display control equipment, and has a high level of prosperity and scarcity, it has coverage for the first time, giving it an “increase in weight” rating.

Risk warning: risk of high customer concentration; risk of macroeconomics falling short of expectations; risk of high concentration of agent procurement; risk of iterative technology upgrades.