Incident: The company released its 2023 annual report and 2024 quarterly 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 884.8877 million yuan, an increase of 53.03% over the previous year; and realized net profit of 68.694 million yuan after deduction, an increase of 898.87% over the previous year. 2024Q1 achieved operating income of 184 million yuan, an increase of 13.93% over the previous year; realized net profit of 34.1653 million yuan, an increase of 21.21% over the previous year; and realized net profit of 30.2846 million yuan after deduction, an increase of 23.91% over the previous year.

The mobile smart terminal business continues to innovate, revenue bucked the trend, and the revenue growth rate of mobile smart terminal vision solutions changed from negative to positive, and the gross profit margin of the business remained stable. In 2023, the company's mobile smart terminal vision solution product revenue was 581.292 million yuan, up 22.82% from the previous year, and the gross profit margin was 90.90%, down 1.52 pct from the same period last year, mainly due to the increase in investment of technicians responsible for project delivery in the current period. In 2023, global smartphone shipments were 1.15 billion units, down 6% year on year. The main reason why the company's mobile phone business revenue bucked the trend is winning the favor and recognition of more customers. Night scene, HDR, hyperscore, portrait, and motion capture solutions developed and launched based on innovative intelligent Turbo Fusion (Turbo Fusion) technology have achieved mass production and continuous delivery. Mobile phone sales rebounded in the fourth quarter of 2023, in contrast to the decline in overall shipments. High-end smartphone shipments set a new record of growth. We are still optimistic that the company's mobile phone business will continue to recover in 2024. In terms of business layout, the company has a forward-looking layout in the XR field, built a complete spatial computing technology system, and embedded most of the core technologies into the OpenXR framework.

Revenue from the smart car business grew rapidly, and the smart car business of several new front-end mass production project companies entered the harvest period. With the mass production and delivery of targeted products, the smart car business revenue grew rapidly. In 2023, the company's intelligent driving and other IoT smart device vision solution products achieved revenue of 74.294 million yuan, a year-on-year increase of 67.26%, and a gross profit margin of 85.96%, an increase of 41.84 pcts over the same period last year.

1. In terms of number of customers, the company added a number of front-loading mass production fixed-point projects with vehicle manufacturers such as Changan New Energy, Great Wall, Ruilan, Jikrypton, Geely, Hezhong, Changan, Rantu, Chery, BAIC New Energy, FAW Hongqi, etc.; 2. In terms of product carrying capacity, the carrying capacity of the company's internal and external cabin algorithm products continued to increase, equipped with the company's DMS, OMS, Face ID, TOF gestures, external body recognition and camera, health monitoring, AVM, smart tailgate, and Sentinel monitoring algorithms, etc. Dozens of models; 3. In terms of going overseas, the company's moped companies explore the international market, It has obtained a total of more than 20 designated projects for overseas models, of which more than 10 models have been mass-produced and shipped, covering the European Union, the United Kingdom, Norway, Israel, Australia, New Zealand and other regions.

We expect the company to still benefit from steady growth in automobile production and sales in China in 2024. According to the China Automobile Association, automobile production and sales will reach 31 million units in 2024, an increase of about 3% year on year. Among them, production and sales of new energy vehicles will reach 11.5 million units, an increase of about 20% year on year.

R&D investment accounted for 54% of revenue, and gross margin increased the company's gross profit margin by 90.35% in 2023, an increase of 1.86 pct over the same period last year, mainly due to the continuous increase in the gross margin of the smart car business. The cost rate for the period was 76.83%, down 3.65 pcts from the same period last year. Among them, the sales expense ratio was 17.62%, an increase of 0.84 pct over the same period last year, mainly due to the increase in the company's wages, salary, travel expenses, and service fees for sales consulting service providers. The management fee rate was 13.53%, an increase of 0.24pct over the same period last year, mainly due to the increase in corporate attorney fees. The R&D cost rate was 54.11%, which is basically the same as the previous year. The company maintained a high proportion of R&D investment. R&D investment accounted for 54.11% of revenue, and the capitalization ratio was 0.

Improve the AIGC capability architecture, launch intelligent commercial solutions, and solve the pain points of the commercial marketing industry in the AIGC direction. The company continues to invest heavily, cooperate with chip platform companies such as Qualcomm and MediaTek, continuously optimize the ArcMuse computing technology engine, and apply ArcMuse's new capabilities to products including PhotoStudio AI Smart Commercial Cloud Studio. In 2024, the company will promote AIGC commercial video generation to capture accurate information on the detailed characteristics, texture, color, etc. of the product based on product images or model images entered by users to generate dynamic commercial videos that can better show the real appearance of the product. It is expected to launch the PhotoStudio AI personal terminal application in 2024.

Investment advice

We expect the company to achieve revenue of 8.32/1,03/1.173 billion in 2024-2026, an increase of 24.2%/20.4%/17.0%; achieve net profit to mother of 130.177/235 million, an increase of 47.3%/35.8%/32.5%; corresponding EPS of 0.32/0.44/0.58, respectively, and corresponding dynamic PE of 85.4/62.9/47.5. Maintain a “Recommended” rating.

Risk warning: Risk of increased competition in the industry; risk of new business progressing less than expected.