Introduction to this report:

Mobile phone main business: Accelerating technology and model promotion. Smart driving business: Continue to increase R&D and fixed-site cooperation. AIGC Commercial Auction: Realize the rapid implementation of new business models. Revenue performance increased steadily in the first half of the year, and the dividend ratio was high.

Key points of investment:

Maintain the target price of $37.82 and maintain the “Overweight” rating. Maintain the 2024-2026 EPS forecast of 0.36/0.48/0.60 yuan, maintain the target price of 37.82 yuan, and give an “increase” rating.

The steady increase in revenue performance in the first half of the year was in line with expectations, and the dividend ratio reached 97.8%. 2024H1 revenue of 0.38 billion yuan increased 12% year over year, of which mobile smart terminals/smart driving and other IoT increased 6.4/ 93% by 0.33/0.043 billion yuan respectively; Q2 revenue increased by 0.2 billion yuan by 10%. Net profit to mother rose 23% to 0.061 billion yuan, and Q2 increased 25% to 0.027 billion yuan. The net operating cash flow of 2024H1 - 0.065 billion yuan turned negative year on year, mainly due to early payment of sales by some customers in the previous year. In the first half of the year, a cash dividend of 1.5 yuan was distributed for every 10 shares, and the dividend ratio was as high as 97.8%.

The main mobile phone industry is speeding up the promotion of technology and models, and Smart Driving continues to increase R&D and fixed-point cooperation. (1) In terms of mobile smart terminals, the company accelerated the promotion of Turbo Fusion technology and products in the first half of the year. In addition to flagship models, it also launched applications in more high-end models, and gradually penetrated into mainstream models. At the same time, engines were optimized and slimmed down, and promoted to mid-range and low-end models.

In addition, the company extended Turbo Fusion image processing technology to video applications. The prototype solution has been recognized by several important customers and supported by platform vendors. (2) In terms of smart driving business class products, smart driving revenue is expected to grow rapidly in the first half of the year, mainly due to the release of targeted models of in-cabin products in the early stages. The company will continue to expand model coverage in the second half of the year. In terms of outboard products, 3D AVM and Sentinel monitoring algorithms continue to be shipped and targeted for new mass-produced models. The weekly vision sensing algorithm was launched on OEM customer models, ADAS products with night vision capabilities completed targeted development for OEM customers, and the upgraded VisDrive integrated cabin and parking solution reached the level of mass production. In terms of integrating front-loading software and hardware, Tahoe, which is facing the inside of the cabin, will continue to develop new overseas designated projects with Tier 1 partners in the second half of the year, and Westlake for the outside of the cabin will accelerate the commercialization process. (3) 2024H1 R&D expenses of 0.194 billion yuan increased 18% year over year, and the R&D cost rate of 50.9% increased 2.8 pct year over year, or mainly due to continuous investment in the automotive business.

While commercial marketing is improving its functions, new business models are being implemented rapidly. Hongsoft PSAI officially launched the Tusheng video function three months ago. It is the first model video generation product with high fidelity and high physical reproduction to be launched on domestic commercial racing tracks. In the first half of the year, it has successively entered the Taobao Qianiu, 1688, Doudian Microapp, and Doudian service markets. In the second half of the year, it will further expand the international e-commerce platform and enter the TikTok application and service market.

Risk warning: risk of going overseas, risk of iterative upgrading of technology, failure to advance AIGC as expected, etc.