Xinhao Photoelectricity Technology is deeply involved in the field of cover lenses for consumer electronics (CE) products and has formed a deep cooperative relationship with well-known clients in the industry. The downward pressure on the Company's traditional Android cover lens business has been largely released, and its profitability is likely to gradually recover as the CE industry rebounds. Meanwhile, Xinhao has actively cooperated with Luxcase Precision Technology to expand the customer base of its cover lens business, which has reached a critical point of making a breakthrough. We expect that customer expansion is likely to be confirmed in the short and medium term, contributing significantly to the Company's cover lens business. In addition, Xinhao has acquired Slenergy to actively expanded its energy storage business. While Slenergy has built an established presence in residential energy storage scenarios with extensive products, Xinhao possesses strong precision manufacturing and channel expansion capabilities, which may bring sound synergies and build a second growth curve for the Company. Based on the assumption of successful key customer expansion, we forecast its 2023E-25E EPS to be Rmb0.28/1.67/3.12 and initiate coverage with a "BUY" rating.

Deeply involved in the consumer electronics sector for the past decade. Established in 2013 and listed in 2021, Xinhao has become one of the larger suppliers of cover lenses in China after years of development, serving as an OEM supplier of customers including Tianma Microelectronics, Samsung Display, TCL China Star Optoelectronics Technology (TCL CSOT), BOE Technology, Japan Display, Truly Opto-Electronics, etc. The Company's earnings came under pressure in 2022, with operating revenue/attributable net profit (ANP) at Rmb1,591mn/-152mn (-15%/-198% YoY), respectively. The pressure was mainly due to soft demand in the CE industry and a significant decrease in cover lens prices. Looking ahead, we believe that the Company's Android cover lens business has stabilized gradually, alongside the expansion of the key customer base and the development of the newly covered business of energy storage, leading us to expect an inflection point for the Company's earnings. The Company's first equity incentive plan since its listing has been unveiled in May 2023, the performance evaluation target of which implies a target revenue CAGR of around 47% from 2023 to 2027.

Actively expanding cover lens customers by teaming up with Luxcase. In light of the scarring effects of Covid-19, we expect modest downward pressure to persist in 2023. IDC expects global smartphone shipments to reach 1.16bn units (-3.2% YoY) in 2023, followed by a gradual increase from 2024 to 2027 to warrant a CAGR of 3%. Xinhao's market share in Android cover lenses has remained stable, and the downward pressure on prices has been largely released. With the improvement in market demand and 3D glass shipments, we anticipate a recovery in Xinhao's Android cover lens business. Furthermore, Xinhao has established a joint venture with Luxcase Precision Technology, a subsidiary of Luxshare Precision (002475.SZ), to actively　　expand the key customer base. The joint venture was established in 2021 and welcomed a capital increase in May 2023. We believe customer expansion has reached a critical point of making a breakthrough: On one hand, after nearly two years of preparation, personnel buildup, and process development, the joint venture has entered a more mature stage. On the other hand, Xinhao has made continuous efforts in recent years, including the introduction of new management personnel, the implementation of equity incentives, and a bucking-the-trend increase in R&D, to continuously improve internal capabilities. In addition, the successful breakthrough of the joint venture in the cover lens business would be strategically significant for Luxcase by helping improve its business coverage. We expect the expansion of the key customer base to be confirmed in the short and medium term, contributing significantly to the growth elasticity of its cover lens business.

Creating a second growth curve by foraying into energy storage. According to EVTank data, the global residential energy storage installed capacity in 2022 was approximately 15.6 GWh (+136% YoY), and it is likely to maintain high prosperity in the future, with a CAGR of 50% from 2023 to 2025. In May 2023, Xinhao announced the acquisition of Slenergy along with a capital increase. According to the official website of Slenergy, its products include three-phase grid-connected inverters, portable energy storage, and smart junction boxes, mainly for residential energy storage scenarios. Based on the performance indicators disclosed, Slenergy has already achieved the key maximum power point tracking (MPPT) technology, and its products support maximum conversion efficiency of 98.6%, presenting a certain edge compared to the industry average. Xinhao has strong channel expansion and precision manufacturing capabilities, which may translate into good synergy effects with Slenergy, helping Xinhao quickly enter the energy storage field.

Potential risks:

Customer expansion missing expectations; a decline in the gross profit margin (GPM) of the main cover lens segment; less-than-expected market expansion in energy storage; disappointing recovery of the CE segment; fluctuations in the exchange rate.

Investment strategy:

Xinhao is deeply involved in the field of cover lenses for CE products and has formed a deep cooperative relationship with well-known clients in the industry. The downward pressure on the Company's traditional Android cover lens business has been largely released, and its profitability is likely to gradually recover as the CE industry rebounds. Meanwhile, Xinhao has actively cooperated with Luxcase to expand the customer base of its cover lens business, which has reached a critical point of making a breakthrough. We expect that customer expansion is likely to be confirmed in the short and medium term, contributing significantly to the Company's cover lens business. In addition, Xinhao has acquired Slenergy to actively expanded its energy storage business. While Slenergy has built an established presence in residential energy storage scenarios with extensive products, Xinhao has strong precision manufacturing and channel expansion capabilities, which may bring sound synergies and build a second growth curve for the Company. Based on the assumption of successful key customer expansion, we forecast its 2023E-25E EPS to be Rmb0.28/1.67/3.12 and initiate coverage with a "BUY" rating. We stop short of providing a target price for now given the uncertainty over the timing of its key customer expansion.