We had a mgmt. call with GalaxyCore recently. As the global No.1 smartphone CIS provider (based on shipment), we remain positive on the company’s outlook, given that 1) new CIS production line is expected to begin pilot production in Q2/Q3 this year, 2) overall CIS ASP will increase due to favorable product mix and 3) additional capacity of DDIC will contribute revenue in 2H22E. Maintain BUY with adjusted TP of RMB34.1 based on revised earnings and new target multiple.

FY21 revenue/NP grew 8.4%/62.8% YoY. GalaxyCore’s slower-than-expected FY21 revenue growth was largely due to weaker smartphone market growth and unfavorable product mix. Global smartphone shipment grew at 4.5% YoY in 2021, turning positive for the first time since 2017 but still lower than pre-pandemic level. Due to the semi shortage and increasing CIS content per smartphone, the demand for 2MP/5MP CIS was strong. The unfavorable product mix led to limited revenue growth for FY21. Looking forward, such headwind is expected to ease as the domestic production of 8MP will gradually pick up. Meanwhile, profitability significantly improved (NPM: 18% in FY21 vs. 12% in FY20).

Positive outlook for its high-end CIS competitiveness as the company is transforming from fabless to fab-lite. GalaxyCore is currently leading in　low- to mid-end CIS market and developing its high-end CIS products. Senior mgmt. (CEO, COO, etc.) are experienced in fab operations. Given this strength, we are positive on its high-end CIS competitiveness once the new production line begins mass production by the year end. We expect the fab- lite business model will secure capacity and serve as a foundation for tech advancement to gain market share in high-end CIS.

Maintain BUY rating with TP adjusted to RMB34.1. We adjusted our TP to　RMB34.1 based on revised earnings for FY22E and lower P/E multiple of 47x (previously 50x) given that investors are cautious under current macro environment and weak Android OEMs outlook. We raised NPM forecast due to improved profitability and favorable product mix. Potential risks include 1) weaker-than-expected market growth and semi shortage, 2) intensified competition and 3) slower-than-expected development of its CIS 12-inch production/manufacturing lines.