2021 and 1Q22 results in line with our expectation

GalaxyCore announced its 2021 results: Revenue grew 8.44% YoY to Rmb7.001bn and net profit attributable to shareholders rose 62.75% YoY to Rmb1.26bn, in line with our expectation. The company improved its cost structure and gross margin supported by product design, large market share, and supply-chain localization. Therefore, its net profit increased in 2021. The company also announced its 1Q22 results: Revenue dropped 10.46% YoY to Rmb1.74bn, and attributable net profit dropped 17.36% YoY to Rmb241mn, in line with our expectation. We attribute the revenue decline to falling smartphone shipments in China and the COVID-19 resurgence.

Trends to watch

1Q22 exports increase significantly; strong overseas demand to offset the impact of tepid domestic sales. Due to strong demand from overseas customers, sales income contribution of exports increased to 65% in 1Q22 from 54% in 2021. We expect the company's mobile CMOS image sensors (CIS) business to outperform its peers, as it has higher share of its overseas customers’ supply chains and more stable shipments in overseas markets in 2022. The company has optimized its product upgrading roadmap. The 8MP, 13MP, and 16MP products have gained more market share and serve as the company’s short-term growth drivers. In 2021, the market share of its 2MP and 5MP products remained above 70%, while 8MP products saw rapid growth in 4Q21. We expect the market share of 8MP products to exceed 30% in 2022. Market size of 13MP and 16MP products is relatively small at present, but we think the company will increase the market share of these products in 2022 and 2023 on the back of its domestic technology-based production capacity and cost advantage.

Fab-lite model enables product R&D; high-end CIS products likely to debut in 3Q22. In 2021, GalaxyCore built its own 12-inch CIS production line, which we think will enter small-scale mass production by end-2022 and contribute 20,000 units/month capacity in 2023. The overall progress of the project is in line with the firm’s expectation. High-end 32MP+ products have entered the internal prototype verification stage and are expected to be commercialized in 3Q22. The company applies anti-stacking technology for its high-end products. We think this technology is not only low cost, but will provide strong revenue and profit growth momentum for the company in 2023 and 2024. The company optimized its security product structure in 2021, and its FPPI (Floating Poly Pixel Isolation) technology helped significantly improve the performance of its products. With its improved product performance and structure, we think the company’s security and automotive CIS businesses will grow rapidly in 2022. We think that prices of display driver chips may have limited growth upside, and the company’s gross margin in this segment may edge downward throughout the year. As GalaxyCore has obvious cost advantage and its product structure has improved, we believe it will continue to perform well even as product prices drop.

Financials and valuation

Given COVID-19 resurgence and the decline in smartphone output, we lower our 2022 revenue forecast 1.6% to Rmb9.23bn, and keep our 2023 revenue forecast unchanged. We lower our 2022 and 2023 net profit forecasts 2.6% and 4.6% to Rmb1.47bn and Rmb1.99bn. The stock is trading at 29.6x 2022e P/E and 21.8x 2023e P/E. We maintain an OUTPERFORM rating but cut our TP 22.3% to Rmb27.8 due to the decline in the median of sector valuation. Our TP implies 47.4x 2022e and 34.9x 2023e P/E with 59.95% upside.

Risks

Prices of display driver chips drop; uncertainties due to COVID-19; smartphone output declines; volatile foreign exchange rates.