The mobile phone market is weak and downgraded, the company's revenue is falling, and its profitability is declining. Due to the repeated epidemic, lack of core, Russian-Ukrainian conflict, global inflation and other factors, the mobile phone market demand is weak, downgrading. In this context, the company's shipments of mobile phone lenses and modules declined compared with the same period last year, and the growth rate of superimposed car lenses and modules was lower than expected. 1H22 revenue recorded 16.97 billion yuan, down 14.4% from the same period last year and 3.9% from the previous month.

The comprehensive gross profit margin decreased to 20.8% from the same period last year, the gross profit reached 3.52 billion, down 28.8% from the same period last year; the profit attributable to shareholders was 1.36 billion, down 49.5% from the same period last year; the net profit margin was 8.0% from the same period last year, down 5.6pct from the same period last year, and 5.1pct from the previous year, mainly due to the decrease in gross profit and foreign exchange losses.

Optical parts segment: revenue increased slightly, mobile phone lens shipments and ASP decreased. The 1H22 revenue of the optical parts division was 4.4 billion, an increase of 1.3% over the same period last year, mainly affected by the weak demand in the mobile phone market and the downgrading of lenses. Shipments of mobile phone lenses fell 9.1 per cent year-on-year to about 650 million, below the guidance of a positive 5 per cent growth rate for the whole year at the beginning of the year. Car lens shipments rose 0.8 per cent to 37.61 million from a year earlier, down from the previous annual growth guidance of 20 per cent, mainly due to a structural shortage of chips, and vehicle business growth was lower than expected. The gross profit margin of the optical parts segment fell to 35.5% from 42.9% in the same period last year, mainly due to a decline in the ASP of mobile phone lenses compared with the same period last year. Although the mobile phone market is still under some pressure in the second half of the year, with the gradual increase in the contribution of the company's new products and the increase in the proportion of overseas customers shipping in the peak season, we believe that the company's optical parts revenue in the second half of the year has a certain degree of resilience.

Optoelectronic products Division: the decline in mobile phone module shipments is a drag on the division income, and the vehicle module business development is smooth.

The 1H22 revenue of the optoelectronic products division was 12.37 billion, down 19.2% from the same period last year, mainly due to weak demand in the mobile phone market. Shipments of mobile camera modules fell by 20.1% to 290 million compared with the same period last year, and the growth rate of vehicle modules was lower than expected. The gross profit margin of the optoelectronic products division recorded 11.6% in the first half of the year, down 3.2pct from the same period last year and 0.8pct from the previous year, mainly due to the higher gross margin base of the mobile camera module due to the better market pattern in the same period last year. During the period, the company completed the research and development of a number of vehicle modules, and the continuous high-quality product delivery laid the foundation for the rapid expansion of the vehicle module business. in the first half of the year, the company achieved mass production of 3 million pixel high-definition vehicle modules; 8 million pixel environment-aware vehicle modules added 3 mass production projects and 3 fixed-point projects. With the rapid growth of the industry, the vehicle module business can be expected in the future.

Lidar and VR pancake modules are in mass production, and AR/VR is expected to grow at a high speed throughout the year. In the first half of the year, the company's AR/VR entered the volume stage, with revenue of 660 million, an increase of 11% over the same period last year, accounting for 3.9% of the revenue. During the period, the company's new generation of VR space positioning lens, VR pancake module has achieved mass production. The company has a solid position as the main supplier of the major customer VR pancake, and we expect the company's AR/VR products to achieve 50% growth in 2022.

Investment suggestion: we predict that the company's income from 2022 to 2024 will be 320.8% 351.3 billion yuan, respectively, compared with the same period last year. 14.4% of the net profit of the company will be 45.8% of 6.26 billion yuan, and the year-on-year net profit will be 39.2%, 50.7% and 36.7%, respectively. We give the company a target price of HK $140, which corresponds to 29 times 2023 PPease E, maintaining a "buy" rating.

Risk hints: the risk of repeated COVID-19 epidemic, the risk of higher-than-expected changes in the macroeconomic environment, the risk of continued malaise in the mobile phone market, and the risk that the growth rate of the car market is not up to expectations.