Preannounces 2021 attributable net profit of Rmb0.56-0.72bn

Leyard Optoelectronic (Leyard) preannounced its 2021 results, estimating that net profit attributable to shareholders turned positive YoY to Rmb0.56-0.72bn. It estimates that in 4Q21, attributable net profit stood at Rmb39-199mn. According to the company’s preannouncement, revenue in 2021 grew 32% YoY to Rmb8.8bn, with its 4Q21 revenue up 38% YoY to Rmb2.97bn, setting a record high. Considering its provision for goodwill impairment of Rmb136mn in 2021, we estimate the company’s net profit in 2021 reached Rmb696-857mn (factoring in the goodwill impairment loss), in line with our expectations.

Going forward, we are upbeat on the company’s competitive advantages in micro LED in terms of energy consumption, brightness and lifespan, and that it may provide next-generation display solutions. We expect Leyard to continue to invest in R&D of direct-view display technologies and leverage its high-end market distribution channels and driver IC technologies. The company will likely become the core player of next-generation display technologies, in our view.

Trends to watch

Micro LED business maintained steady progress; production capacity likely to double. According to the company’s preannouncement: 1) In terms of Chip-on-Glass (COG), Leyard and TCL CSOT collaborated on the development of the world’s first 75-inch P0.6 AM direct-view micro LED TV and the world’s first COG direct-view MLED series displays. 2) Lijing, a joint venture between Leyard and Epistar, plans to expand its production capacity from 800kk/m to 1,600kk/m, and has secured new orders worth Rmb0.32bn. We expect the company to make breakthroughs in micro LED technology and bring down the costs, continuously boosting revenue proportion of its micro LED business.

Extensive use of LED displays at the 2022 Winter Olympics and Spring Festival Gala 2022 likely to continue to boost LED penetration. On the stage of Spring Festival Gala 2022, a 720-degree dome was built with 4,306 square meters of LED screens, over 2,000sqm of which were provided by Leyard. In addition, the company supplied approximately 11,000sqm of LED screens to the 2022 Winter Olympics opening ceremony. We believe extensive use of LED displays at major activities and sport events will likely help strengthen recognition of LED display technology.

VR business maintained high growth; core hardware for VR content creation. According to its preannouncement, Leyard’s subsidiary, Natural Point (NP), reported 72% YoY earnings growth in 2021. NP boasts self-developed Opti Track motion capture products, and is one of the cutting-edge solutions suppliers in the motion capture market. Amid the growing trend of metaverse and AR/VR content development, we expect NP to continue to make progress in virtual construction via self-developed technology, driving high growth in its VR business.

Valuation and recommendation

Considering provision for goodwill and accounts receivable impairment and increased competition in some products in 2022, we lower our 2021 and 2022 EPS forecasts by 19% and 9% to Rmb0.25 and Rmb0.42, and introduce our 2023 EPS forecast at Rmb0.52. The stock is trading at 21.8x 2022e and 17.6x 2023e P/E. We maintain an OUTPERFORM rating. Given the elevated valuations resulting from the company’s exploration in frontier micro LED and VR businesses, we maintain our target price of Rmb12.0 (28.9x 2022e and 23.3x 2023e P/E), offering 32% upside.

Risks

Disappointing demand for LED; disappointing development of VR photography and micro LED.