1H22 results miss our forecast

GalaxyCore reported its 1H22 results: Revenue dropped 10.63% YoY to Rmb3.3bn and net profit attributable to shareholders fell 20.23% YoY to Rmb514mn. Its 1H22 results missed our expectations as the resurgence of COVID-19 in China and other countries, inflation, and geopolitical conflicts weighed on shipments of smartphones.

Trends to watch

Utilizing innovative system-on-chip (SoC) integration technology in high-price CMOS image sensors (CIS). Earlier in August, GalaxyCore unveiled the 32-megapixel (MP) CIS GC32E1. Coming with a 0.7μm small pixel platform, this product can be utilized in front cameras of high-end smartphones. According to GalaxyCore, SoC integration technology-enabled GC32E1 incurs lower costs than stacked CIS, and SoC integration technology can resolve heat dissipation problems. GalaxyCore has sent samples of this product to customers, and expects to start mass-production by end-2022. Small pixel platform related technologies are essential to the shift from low-pixel sensors to high-pixel ones, in our view. GalaxyCore's 0.7μm small pixel platform has proven mature by the rollout of 32MP CIS. We expect the firm to accelerate the R amp;D of high-end 0.7μm products, and high-pixel products to become the main growth engines for revenue in 2023 and 2024.

Inventories stay flat QoQ in 2Q22; we think in 3Q22, the firm will mitigate the impact of cyclicality in CIS industry-wide destocking.

GalaxyCore has relatively strong bargaining power in the 2MP and 5MP CIS market, as: 1) low-price CIS are dominant in its product mix; and 2) the company accounts for more than 70% of the market for 2MP and 5MP CIS.

Low-price CIS are utilized in a wide range of products, and they have relatively long lifetimes. As a result, prices of low-price CIS are less likely to decline amid weak demand, compared with high-pixel products that see parameters change with each passing year.

GalaxyCore continues to improve the features of its products and reduce die sizes. As integrated foundry costs continue to drop, we think the firm's gross margin (GM) will remain stable.

Financials and valuation

We cut our revenue forecasts 28.7% to Rmb6.58bn for 2022 and 33.1% to Rmb8.82bn for 2023, and cut our net profit forecasts 29% to Rmb1.04bn for 2022 and 39.8% to Rmb1.2bn for 2023, to reflect weakening demand for consumer electronics. The stock is trading at 44.1x 2022e and 38.3x 2023e P/E. We believe the firm is less likely to reduce prices of low-price CIS due to its leading position in the low-price CIS market. In addition, high-price CIS are likely to enhance the firm's growth potential in the long term. We maintain an OUTPERFORM rating, but cut our target price 14.0% to Rmb23.9. Our TP implies 57.4x 2022e and 49.9x 2023e P/E, offering 30.0% upside.

Risks

Lower prices for display drivers; prolonged COVID-19 pandemic; lower shipment of smartphones; volatile exchange rates.