1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 2.79 billion yuan, up 43% year on year and 1.6% month on month; net profit to mother was 77.49 million yuan, turning a loss into a profit year on year, up 9% month on month, lower than our expectations. Among them, 2Q24's revenue for the single quarter was 1.501 billion yuan, up 37% year on year, up 16% month on month, and net profit for the single quarter was 47.33 million yuan, down 56% year on year and 57% month on month, lower than our expectations. We think it was mainly due to delays in new products and demand from some end customers falling short of expectations.

Development trends

The 1H24 high-end CMOS image sensor is gradually entering mass production, and its single-chip technology has been recognized by the market.

Revenue growth from high-pixel products has become the main driving force for 1H24. We have seen that 2H23 has so far received market recognition from the company's single-chip innovation path and has been adopted by multiple brand customers. According to the company announcement, 13-32MP products have achieved full-line mass production, 50MP pixel products have been produced in small batches, and sales of 1H24 13MP and above products have reached 0.606 billion yuan. While mass-producing advanced products, the company announced the launch of the second-generation single-chip 32MP image sensor GC32E2 and successfully mass-produced it in the overseas version of the OPPO Reno12. We believe that the company is expected to use the cost performance advantages of single-chip technology to expand its share in the high-end CIS market and consolidate its leading position in single-chip technology through differentiation and iteration.

The CIS shipping structure for non-mobile phones has been upgraded, and the factory has passed vehicle regulations certification. The company announced that shipments of 4MP products in non-mobile CIS continued to increase, and 8MP products were successfully mass-produced. According to the company announcement, Geke Semiconductor obtained 16949 vehicle certification, laying the foundation for the company to enter the automotive front assembly market. In the field of display drivers, the company's shipments of HD and FHD resolution TDDI products increased, but the gross margin of 1H24 driver chips fell to 17.26% due to rising wafer costs. The company announced that 2H24 is expected to launch AMOLED products based on wearables and smartphones one after another. We believe that high-end non-mobile CIS products are expected to become the company's new growth curve and broaden the company's revenue growth space.

The upgrading of the factory product line structure is expected to improve profits in the long term. The company announced that it has achieved mass production of 8MP and 13MP products in its own factory, small-batch production of 50MP products, product line process improvements, and the product shift from low-end to mid-high-end products. We believe that owning a factory is beneficial to improving the company's competitiveness in terms of cost, price and process, and long-term profit margins are expected to increase.

Profit forecasting and valuation

As demand fell short of expectations, we lowered our 2024/2025 revenue forecast by 8.4% and 7.7% to $61.62 billion and $8.295 billion. Considering the increase in OEM costs for some products, we cut our 2024/2025 net profit by 28.6% and 25.8% to 2.48 billion yuan and 697 million yuan. Considering the constant trend of high-end upgrading of the company's products, we maintained the industry rating and lowered the target price by 28.6% to 15 yuan, corresponding to 55.97 times P/E in 2025. The current stock price corresponds to 39.85 times P/E in '25, and there is room for 40% increase.

risks

Demand falls short of expectations, competition intensifies, sales of high-end products fall short of expectations, and risk of inventory depreciation.