Lens Tech's 2023 Outlook: Navigating AI Replacement Trend?

The recent launches of new products by tech giants Apple and Huawei have sparked keen interest in the profitability landscape of the consumer electronics industry. By October 21, the stock price of Lens Technology (300433.SZ) reached 23.21 yuan, marking a remarkable annual increase of 75.83% and achieving its highest price since February 2022. This stellar performance has outpaced that of industry heavyweights such as Luxshare Precision (002475.SZ) and GoerTek (002241.SZ).

On the heels of this, Lens Technology announced impressive results in its third-quarter report, revealing that its revenue for the first three quarters reached an historic peak of 46.227 billion yuan, nearly matching the company’s revenue for the entirety of 2022. The net profit attributable to shareholders stood at 2.371 billion yuan. Even though there was a slight pressure on profit margins, which hindered a complete recovery compared to the 3.297 billion yuan reported for the same period in 2021, the overall performance nevertheless showcased the company's resilience.

This year has seen a moderate recovery in the demand for consumer electronics after a prolonged inventory digestion period lasting over a year. Consequently, quarterly revenue and profit levels for leading companies in the industry have gradually rebounded. With several top smartphone manufacturers rolling out new products since the third quarter, the momentum within the industry continues to thrive. Notably, Lens Technology recorded a net profit for the third quarter that marked the highest since the fourth quarter of 2022, exhibiting a substantial quarter-on-quarter increase of 173.46%. Reviewing its performance from 2022 to 2023 indicates that Lens Technology has emerged from the trough experienced during the cyclical downturn. Looking at a longer-term perspective, the advent of AI-enabled smartphones presents a transformative cycle that could unlock new growth avenues for leading consumer electronics companies.

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As Lens Technology aims to exceed an annual revenue target of 60 billion yuan, the robust demand is particularly evident during the traditionally busy third quarter in the consumer electronics sector. The earnings projections provided by various listed companies have confirmed a broader trend of recovery throughout the market.

Specifically, Lens Technology achieved a remarkable revenue of 46.227 billion yuan for the first three quarters, a year-on-year increase of 36.74%. The company also realized a net profit of 2.371 billion yuan, up 43.74% year-on-year. These figures reflect a record-setting journey for Lens Technology, with the potential to surpass the 60 billion yuan revenue milestone for the first time this year. Profit generation has also surpassed levels recorded in both 2021 and 2022, with only 4.896 billion yuan noted for the year 2020.

Delving into the third quarter specifically, Lens Technology generated revenue of 17.361 billion yuan, with annual growth exceeding 27%. The net profit attributable to shareholders reached 1.509 billion yuan, illustrating a remarkable growth of 173.46% compared to previous quarters—3.09 billion yuan in the first quarter and 5.55 billion yuan in the second quarter—setting the highest level since the final quarter of 2022.

Amid the consumer electronics industry's seasonal fluctuations, Lens Technology has been consistently increasing its quarterly profits. The company's performance in the fourth quarter has historically been the highest annually, making it crucial to achieve strong results in this period. Analysts predict that Lens Technology’s total revenue for the year may reach approximately 68.074 billion yuan, with net profits hitting around 3.897 billion yuan—both figures significant as they mark record highs for revenue and the second-highest net profits historically.

Lens Technology concentrates primarily on the smartphone and PC segments, while also venturing into smart wearables, electric vehicles, and intelligent cockpit components. The company incorporates a variety of materials, including glass, metal, sapphire, ceramics, plastics, fiberglass, and carbon fiber. Its downstream clientele features major players such as Tesla, Apple, Huawei, Xiaomi, and CATL, among others.

While the third quarter earnings report provided a slightly less detailed narrative than the semi-annual report, it refrained from addressing specific reasons for the growth in earnings. On a broader industry level, global smartphone shipments are expected to increase by 4.0% year-on-year by the third quarter of 2024, marking five consecutive quarters of growth, particularly buoyed by robust contributions from Chinese manufacturers like Vivo, OPPO, Xiaomi, Lenovo, and Huawei, thus laying a solid foundation for the performance uplift for industry chain suppliers. However, the growth in shipments varies with Samsung, Apple, Xiaomi, OPPO, and Vivo claiming the top five positions in terms of shipment volume, according to IDC data.

Insights from Zheshang Securities' research report suggest that Lens Technology managed to attain an impressive gross profit margin of 17% and a net profit margin of 5.21% in the first three quarters, both reflecting annual peaks, indicating strong and healthy compound growth within traditional glass components, metal parts, assembly, and automotive businesses. The enhancement in profit margins further substantiates the narrative: following the launch of new devices by major clients in North America during the third quarter, there has been a significant ramp-up in the delivery of glass and metal products, alongside a rapid increase in the contribution of Android devices to overall sales.

In terms of investor interest, the focus remains on the consumer electronics recovery and its relationship with demand growth and profitability within the industry’s supply chain.

The fourth quarter represents another season of opportunity for consumer electronics, with Honor and Vivo both launching new models, including the Honor X60 series and Vivo X200 series. The coming weeks will see a series of product launch events from Honor, Huawei, Xiaomi, and other brands, which are poised to drive a sustained recovery in the consumer electronics sector.

Looking further ahead, the recent iPhone 16 launched by Apple symbolizes a foray into AI features, with market expectations for substantial AI advancements with the anticipated release of the iPhone 17 in 2025. This device is projected to be one of the most iconic and influential tech products in the near future.

The prevalence of new products, including the SE model that Apple is set to release in the first quarter of next year, will expedite the restocking for supply chain vendors. Analysts express optimism that leading consumer electronics firms can achieve remarkable growth rates both year-on-year and quarter-on-quarter. It is typical for the first quarter to experience lower shipment volumes due to the overlap of the Christmas holiday in Europe and the Spring Festival in China, followed by a gradual increase in demand throughout the ensuing quarters. One TMT analyst commented, “So far this year, the recovery has been moderate, and we haven't yet seen disruptive products that ignite consumer enthusiasm, but AI mobile phones remain the ultimate focal point for the long term.”

According to Lens Technology's third-quarter report, all top ten shareholders increased their holdings in the company, conveying a consensus in expectations that contrasts with the previous two quarters when there were discrepancies among major shareholders. As of September 30, the Stock Connect was the fourth largest shareholder, having increased its holdings by 1,863.52 shares—marking the highest increase among the top ten shareholders. This boosted their total holdings to 132 million shares, the highest recorded for the year. Additionally, the China Structural Adjustment Fund increased its stake by 14.4407 million shares, securing the position of the fifth largest shareholder.

In the realm of public funds, both E Fund’s ChiNext ETF and Huatai-PB's CSI 300 ETF increased their stakes by over 14 million shares each. Meanwhile, E Fund’s CSI 300 ETF and Xingquan He Run Mixed Fund emerged as the ninth and tenth largest shareholders, respectively. By the end of the third quarter, the top ten shareholders collectively held 3.647 billion shares, accounting for 73.19% of the total share capital, representing an increase of 2.47 percentage points compared to previous quarters.