Yongxin Optics （aka Novel Optics） is a leading domestic manufacturer of optical instruments and core optical components. With a strong foothold in the two major segments of microscope and barcode machine vision, the Company has proactively extended into two new fields, ie vehicle and healthcare applications, to establish a “2+2” business strategy. We are optimistic about the Company's vehicle-mounted business, which stands to benefit from the upgrades in advanced driver-assistance system （ADAS） and the rapid ascent of light detection and ranging （LiDAR）， and thus achieve solid revenue growth. The microscope business is well-poised to benefit from the trend of import substitution and localization in the long term as well as the Company’s strategy of offering high-end products. We　forecast its 2023E/24E/25E EPS to be Rmb3.08/3.54/4.47 and initiate　coverage with a “BUY” rating and a target price of Rmb123.

Company overview: Leading domestic manufacturer of optical instruments and core optical components with an extended presence in LiDAR and medical applications.

In nearly three decades since its establishment, Yongxin Optics （aka Novel Optics） has been dedicated to the R&D and production of optical microscopes and high-end optical components, covering a wide range of downstream applications including vehicles, barcode scanning, machine vision, professional imaging, and healthcare. Its customers include Hesai Technology, Innoviz, Innovusion, Sony, Sysbol Technologies, Cognex, and Zeiss. The Company recorded revenue of Rmb576mn/795mn/829mn during 2020-22. In 2022, optical components/microscopes accounted for 54%/43% of the revenue and 53%/41% of the gross profit. Yongxin Optics remains committed to its “2+2” strategy, which entails two established segments including microscopes and barcode machine vision, as well as an extended presence in LiDAR and medical fields. The Company is committed to building a world-leading position in scientific instruments and core optical components.

Vehicle-mounted optics: Embracing the rise of auto intelligentization. Riding the established trend of auto intelligentization, the shipments of cameras and LiDAR are likely to increase continuously, bolstering both the volume and price of vehicle-mounted optics. For LiDAR, the Company has established partnerships with LiDAR companies and tier-1 manufacturers, supplying them with core optical components such as rotary mirrors, prisms, windows, filters, and more. These components account for approximately 10%-20% of the overall value of LiDAR systems. We estimate that the LiDAR optical parts market is less than US$100mn in 2023. Under a pessimistic scenario, we anticipate shipment of 30mn units of LiDAR in 2030, corresponding to an optical parts market of about US$1bn-1.5bn. The Company maintains close collaborations with LiDAR companies and tier-1 auto suppliers, including Hesai Technology, Innoviz, Innovusion, Benewake, and others. Its products have been adopted by startup carmakers such as NIO and Li Auto, as well as robotaxis, robotrucks, and other autonomous driving applications. For tier 1 manufacturers, the Company has successfully entered　　the designated supplier list of Magna and is poised to continue to cut into the supply chain of BMW, Volkswagen, and other traditional OEMs. In addition, it has expanded its LiDAR customer groups from passenger cars and commercial vehicles to rail transportation, industrial automation, the internet of vehicles （IoV） and other fields. It also plans to enter the LiDAR assembly market. In the realm of vehicle lenses, Yongxin Optics has established deep cooperation with Sony and made small batch shipments of lens modules. We anticipate a further increase in the proportion of module shipments in the future.

Optical instruments: Benefiting from import substitution and the high-end product strategy.

The Company has been providing original equipment manufacturing （OEM） services for well-known international microscope manufacturers including Nikon and Leica Microsystems, with decade-long business partnerships. At the same time, it is also promoting its own brands. In 2022, its high-end optical microscope brand, the Nexcope series, achieved remarkable revenue exceeding Rmb100mn, representing nearly 70% YoY growth. This accounted for about 30% of the microscope business revenue that year. Additionally, the Company has accelerated its entry into the medical optics field, covering a range of products including surgical microscopes, high-end medical biological microscopes, and embedded microscope systems. At present, the Company's independently developed high-end products have scaled up, breaking foreign monopoly and filling the gap of Chinese enterprises in the world's top microscope market. We believe that the Company will continue to expand the category of high-end microscopes and explore new application areas, making it well-poised to benefit from the trend of import substitution and further expand the market share of its high-end microscope products in China.

Barcode scanning and machine vision: Benefiting from the development of industrial automation and in-depth cooperation with industry leaders. In the field of barcode scanning, Yongxin Optics has been providing barcode scanning lenses and optical components to established industry giants such as Symbol Technologies, Honeywell, Datalogic, and NCR. At present, the Company is accelerating its foray into complex components for barcode scanning lenses to consolidate its competitive advantage. In the field of machine vision, the Company is a world-leading supplier of liquid lenses and the world's first company to mass produce liquid lenses. Its products have been supplied to Cognex and Zebra, with shipments ramping up rapidly. In the meantime, it has also acquired major international customers such as Walmart and FedEx. We believe its barcode scanning and machine vision business stands well to benefit immensely from the advances of smart logistics, industrial automation, and artificial intelligence （AI） use cases.

Potential risks:

Less-than-expected technology development and iteration; intensified industry competition; less-than-expected vehicle-mounted optics expansion; exchange losses; changes in the international trade environment.

Investment recommendation:

The Company is a leading domestic manufacturer of optical instruments and core optical components with an extended presence in vehicle-mounted optics and initiatives in self-develop independent microscope brand. It stands well to deeply benefit from ADAS upgrades and the import substitution trend of microscopes. We forecast its 2023E/24E/25E net profit to be Rmb340mn/391mn/494mn, corresponding to EPS forecast of　　Rmb3.08/3.54/4.47. Based on the PE valuation method, comparable companies such as Sunny Optical （02382.HK）， Lante Optics （688127.SH）， Crystal-Optech （002273.SZ）， LianChuang Electronic （002036.SZ）， Siglent Technologies （688112.SH）， Rigol Technologies （688337.SH） are trading at 44x 2023E PE on average based on Wind consensus estimates, while the Company trades at 27x 2023E PE. Per the discounted cashflow （DCF） valuation method, we forecast the Company's reasonable equity value to be Rmb14.3bn. Combining the PE and DCF valuation results, we forecast the reasonable market value to be Rmb13.5bn, corresponding to a target price of Rmb123. We initiate coverage with a “BUY” rating.