The 2023 results are in line with our expectations. The 1Q24 results are lower than our expectations. The company announced the 2023 results: operating income of 1,020 million yuan, up 50% year on year, and net profit of 203 million yuan, up 54% year on year. It is in the middle of the previous performance forecast, which is in line with our expectations. Corresponding to the 4Q23 quarter, Carlet achieved operating income of 452 million yuan, an increase of 77% over the previous year, and net profit to mother of 93 million yuan, an increase of 71% over the previous year.

At the same time, Carlet released 1Q24 results, with operating income of 143 million yuan, up 8% year on year, and net profit of 19 million yuan to mother, down 35% year on year, lower than our expectations. We believe that the main reason for the pressure on Carlet's 1Q24 business was: 1) weak downstream demand in 1Q24, the company actively adjusted channel inventory, and delayed delivery of some products, leading to a slowdown in revenue growth; 2) On the cost side, 1Q24 increased personnel recruitment, expanded R&D and sales teams, compounded the effects of equity incentive payments and amortization, etc., putting pressure on pre-cost performance.

Looking at business by business in 2023:1) LED receiving equipment: The company achieved revenue of 363 million yuan, a year-on-year increase of 35%, and gross margin increased 4.71ppt to 22.89%. We believe that the main reason is that downstream LED display lamp bead shipments continue to grow, driving a steady increase in the company's related business; 2) Video processing equipment:

It achieved revenue of 498 million yuan, an 85% year-on-year increase, and gross margin increased 4.13ppt to 63.77%. We think the main reason is that the company continues to expand overseas markets, and the share of high-end products such as 4K has increased.

Development trends

Continuous investment in R&D and sales helps continue to grow overseas. Carlet's R&D and sales expenses increased 62%/105% year-on-year respectively in 2023. Through team expansion, the company increased customer coverage and promoted research and development of new products and technologies such as MICA (Mini/Micro LED Intelligent Inspection Equipment) and Vivid M10 chips. We believe this investment is expected to guarantee the company's continued growth momentum in the future. Furthermore, according to the annual report, Carlet expanded more than 100 overseas distributors in 2023, and its products received a good response, laying a solid foundation for market expansion. On the revenue side, overseas increased 94% year-on-year to 136 million yuan in 2023. We are optimistic that the company's overseas business will still be an important incremental contribution in 2024, driving the company's revenue and profit to continue to grow rapidly. According to the annual report, Carlet's overseas gross margin reached 79.35%, which is far higher than the company's overall level. We believe that the main reason is that overseas customer products are relatively high-end and price competition is low. We are optimistic that Carlette's overseas growth will drive the overall gross margin improvement trend.

Profit forecasting and valuation

We maintain Carlette 2024/25e EPS at 4.51/7.03 yuan, and the current stock price corresponds to 2024/25e21.0/13.5x P/E. We maintain our outperforming industry rating. Considering the industry's current downward valuation center, we lowered our target price by 12% to 115.0 yuan, corresponding to 2024/25e 25.5/16.4x P/E, corresponding to the current 21% increase.

risks

Demand in the downstream LED industry is weak; competition in the LED display control and video processing equipment industry is intensifying.