OmniVision reported 1H26 revenue of RMB14.0bn, flat YoY, while net profit fell 39.9% YoY and GPM declined 1.7ppt YoY to 28.8%, as lower-margin distribution revenue rose 41% YoY to 23% of total sales. 2Q26 revenue rose 18.7% QoQ to RMB7.61bn, exceeding guidance of RMB7.15-7.54bn and Bloomberg consensus of RMB7.4bn, although GPM remained soft at 28.3%. The 3Q26 guidance of RMB7.58-8.13bn revenue and 29.4-30.7% GPM points to modest sequential growth but a clearer margin recovery. We cut 2026E/27E revenue by 12%/12% and GPM by 2.1ppt/2.9ppt factoring in the results. Nevertheless, we maintain BUY as earnings approach a cyclical trough and the mix shifts toward higher-value applications. We lower our TP to RMB125, based on 33x 2027E P/E (previously 33x 2026E), below its two-year historical forward avg. P/E of 36.7x to reflect cyclical weakness.

Mixed segment performance, but higher-value applications remained resilient. Consumer-electronics CIS revenue fell 31% YoY and accounted for 31% of CIS sales, reflecting weak smartphone demand and product transitions. Auto CIS declined 16% YoY and represented 34% of CIS sales, as inventory adjustments weighed mainly on 1Q26; however, demand recovered visibly in 2Q26 and should benefit from rising camera content and higher-resolution ADAS adoption. In contrast, professional-imaging CIS grew 53% YoY to 14% of CIS sales, machine-vision and robotics CIS increased over 70% YoY, medical CIS rose 15% YoY, auto analog expanded 67% YoY, and display solutions grew ~13% YoY. This divergence suggests a structural product-mix transition rather than a broad-based deterioration in competitiveness, in our view.

Robotics, auto analog and optical connectivity are emerging as new growth engines. Higher-end robotic data-collection systems can carry over US$100 of image-sensor content, offering meaningful upside despite the business’s small current base. In auto analog, OmniVision is expanding across MCU, PMIC and SBC products, leveraging its established customer base to evolve from a sensor vendor into a platform supplier. Optical connectivity could offer an even larger opportunity, with mgmt. estimating that its product portfolio could provide US$10 or more of semiconductor content per optical module, depending on product adoption. We therefore view optical connectivity as meaningful long-term earnings optionality rather than a material near-term contributor.

OmniVision is entering a gradual recovery. Volume stabilization became visible in 2Q26, while margin normalization should begin in 3Q26. Structural earnings expansion is more likely in 2027, when higher-value businesses should contribute for a full year. Maintain BUY with TP of RMB125.

Key risks: Slower-than-expected product R&D, weak demand recovery, etc.