1H22 results in line with our expectations

Leyard Optoelectronic (Leyard) announced its 1H22 results: Revenue rose 3% YoY to Rmb3.70bn, and attributable net profit fell 6% YoY to Rmb268mn, within the mid- to upper-end of the firm’s preannounced range and in line with our expectations. In 2Q22, revenue dropped 8% YoY to Rmb1.94bn, and attributable net profit fell 16% YoY to Rmb153mn. We think the firm’s 1H22 results were under pressure because: 1) the landscape lighting and cultural businesses were impacted by COVID-19 resurgence, with revenue down 49.72% YoY; and 2) the COVID-19 resurgence in eastern China in April-May weighed on the growth of the smart display business.

In 1H22, revenue from the smart display business grew 16% YoY to Rmb3.18bn, with gross margin up 0.15ppt YoY to 28.8%; revenue from the landscape lighting and cultural businesses dropped 49.72% YoY to Rmb361mn, with gross margin up 9.26ppt YoY to 36.4%; revenue from the virtual reality (VR) business grew 13.6% YoY to Rmb159mn, with gross margin up 25.88ppt YoY to 84.6%.

Trends to watch

Launch of the Black Diamond products to boost micro LED sales; continuous expansion of the smart display market. Leyard recently released the Black Diamond product series, which adopts the flip-chip micro LED and packaging technologies. The new products boast strong stability and reliability, are able to improve brightness and contrast ratio notably, and enjoy great cost-effectiveness. We expect the product series to continue to contribute greater growth potential for the micro LED market. In addition, Leyard started to draw up plans for market development in Asia, Africa and Latin America since end-2021, and has built a team of over 100 employees to conduct product development and market promotion. The firm has secured orders for rental and outdoor advertisement products, and started mass production in June. We are upbeat on the firm’s continuous expansion of overseas markets, which may bolster the sustained growth of its revenue and earnings from the smart display business.

Mass transfer efficiency improved; continuous breakthroughs being made in new micro-LED technologies like quantum dots (QDs). Leyard and Saphlux, a company in which the former holds a stake, jointly completed the R&D and testing of micro LED displays, and developed the first QD-based micro LED display ahead of their peers. We think the QD technology is likely to accelerate the commercialization of micro LEDs. In addition, Leyard’s joint venture Leadstar has adopted the mass transfer technology and improved the mass transfer efficiency from 98.9% to 99.995% at present through continuous technological upgrading. Coupled with falling prices of chips, the technology may foster sustained revenue growth of relevant businesses.

Financials and valuation

Given the COVID-19 impact on the landscape lighting and cultural businesses, we cut our 2022 and 2023 EPS forecasts by 5% and 1% to Rmb0.40 and Rmb0.51. The stock is trading at 16.2x 2022e and 12.6x 2023e P/E. We maintain OUTPERFORM rating. Considering the share price has largely reflected the COVID-19 impact in 1H22, we maintain our TP at Rmb8.0, which implies 20.2x 2022e and 15.7x 2023e P/E and offers 24% upside.

Risks

Disappointing demand recovery for LED displays; disappointing development of new businesses due to the COVID-19 resurgence.