2021 earnings estimated to grow 46.83-74.57% YoY

GalaxyCore preannounced 2021 earnings, estimating that its revenue grew 3.04-16.05% YoY to Rmb6.65-7.49bn, net profit attributable to shareholders rose 46.83-74.57% YoY to Rmb1.14-1.35bn, and recurring net profit attributable to shareholders grew 41.75-68.52% YoY to Rmb1.09-1.29bn in 2021. The firm's 4Q21 revenue was estimated at Rmb1.4-2.24bn, net profit attributable to shareholders was Rmb0.2- 0.42bn, and recurring net profit attributable to shareholders was Rmb0.18- 0.38bn. The median of the company’s preannounced net profit range slightly missed our expectation and we attribute this mainly to weak demand for smartphones in 2H21. We maintain OUTPERFORM rating and cut our target price by 21.0% to Rmb35.78.

Trends to watch

Low-pixel CIS: Multi-camera trend slows; watch for possible market share gains for 8MP products in 2022. We note the bill of materials cost　of 5G phones is impeding the trend to multi-cameras, and that Android-based smartphone brands such as Xiaomi, OPPO and Vivo, have downgraded some smartphone camera designs from four cameras to three. Meanwhile, some smartphone companies have upgraded from 2-megapixel (MP) cameras to 5MP or 8MP cameras. We think that in 2022 the 2MP CMOS image sensor (CIS) market will shrink slightly, but the 5MP and 8MP CIS markets will remain relatively stable. Thanks to its cost advantages, we are optimistic that GalaxyCore’s market share for 8MP products (manufactured by domestic contract manufacturers and resubmitted for sample testing) will rise to 30-50% in 2022.

High-pixel CIS: 32MP products to be installed on smartphones priced at about Rmb1,000/unit; watch progress of 32MP product testing in　2022. We note that small-pixel technologies are improving the value for money of 32MP or higher-pixel CIS products, allowing such products to be installed on lower-priced smartphones, implying plenty of room for growth.At present, GalaxyCore’s 32MP CIS products have entered the stage of internal evaluation for sample products. We believe that the company will send sample 32MP and higher-pixel products for testing in 2Q22, shipments of such products are likely to begin in late 2022 and such products are likely to generate revenue for the company starting from 2023.

Progress of TDDI business faster than expected; high-quality supply chain resources to create economies of scale. The CIS industry has　high barriers to entry created by economies of scale and by large companies having had the flexibly to respond to structural changes in the industry's production capacity supply, become strategic customers of contract manufacturers and lock in better prices. GalaxyCore has partnered with wafer manufacturers such as Hua Hong, CanSemi and Wuhan Xinxin, and we think the company’s self-built back-end production facilities are likely to be gradually put into use in 2022. We think this will help the company maintain its low-cost advantage in contract manufacturing. The company's touch and display driver integration (TDDI) products have successfully entered supply chains of first-tier brands in 2H21 thanks to the stable performance and high value for money of such products, and we expect the company’s TDDI business to maintain rapid growth in 2022.

Valuation and recommendation

Due to weak demand for smartphones, we cut our 2021 and 2022 revenue forecasts by 16.1% and 19.3% to Rmb7.05bn and Rmb9.38bn, and lower our 2021 and 2022 net profit forecasts by 6.9% and 20.8% to Rmb1.25bn and Rmb1.51bn. We introduce our 2023 revenue forecast at Rmb13.3bn and our 2023 net profit forecast at Rmb2.08bn. The stock is trading at 42.6x 2022e P/E. We maintain OUTPERFORM rating and cut our target price by 21.0% to Rmb35.78 (59.6x 2022e P/E), offering 39.5% upside.

Risks

Declining demand for smartphones; intensifying competition in the market; disappointing efforts to attract customers; disappointing R&D.