Core views:
　　As a global leader in automotive display modules, BOE Varitronix (BOEVx) serves as the sole gateway for BOE Technology Group (BOE) to tap into this segment and is well-positioned to benefit from the wider adoption of smart cockpit going forward. Leveraging BOE’s production capacity, customer base, and cost advantage, the Company has achieved significant market share growth and robust earnings momentum. We are optimistic about the long-term growth prospects of BOEVx as a leading midstream manufacturer along the automotive display industry chain. Additionally, BOEVx stands well to benefit from the trend of multiscreen interaction and seize growth opportunities through integrated automotive display systems and smart cockpit. We initiate coverage with a “BUY” rating.
　　Abstract:
　　Company profile: A global leader in automotive display modules boasting a high growth brought by smart cockpit penetration.
　　BOEVx, is a global leader in automotive display modules, focusing on displays and solutions for the automotive and industrial sectors. Founded in 1978, it was listed on the Hong Kong Stock Exchanges (HKEX) in 1991 and was acquired by the global display panel leader BOE in 2016. According to Omdia, in 1H22, BOEVx’s shipments of its medium-/large-sized auto displays ranked first by both units and total area shipped in the global market. The Company’s revenue exceeded HK$7.7bn (+71% YoY) in 2021, with a 28% CAGR in 2016-21. In a breakdown, the revenue of its automotive display and industrial display business accounted for 84% and 16% of the total, respectively, in 2021. The Company may follow a three-step strategy of promoting automotive display modules, automotive display system and smart cockpit solutions, and is likely to benefit from its continuous effort in automotive display system assembly business and the trend of smart cockpit boom to achieve a rapid growth in earnings.
　　Industry analysis: Smart cockpit setting the trend for display development, with the multiscreen interaction reshaping the industry chain.
　　1) Industry trend: Smart cockpit drives the trend of multiple and customized screens in automotive with larger size and high definition. According to forecast of IHS Markit, the penetration rate of smart cockpit in China/global will rise from 35%/38% in 2019 to 76%/59% in 2025. 2) Market size: We estimate that the global automotive display market will be about US$8.017bn in 2022 and will reach US$13.840bn in 2025, with a 19.96% CAGR in the next three years. 3) Industry chain trend: The trend of smart cockpit with multiscreen interaction promotes the reshaping of the industry chain. OEMs can choose to cooperate directly with tier-2 manufacturers to improve communication efficiency and reduce costs, while tier-2 manufacturers are likely to extend downstream links. Meanwhile, the vertical supply chain will gradually shift to a flattened one. 4) Competitive landscape: A monopoly competition pattern. According to Omdia, BOEVx/LG Display/Tianma Microelectronics/Japan Display (JDI)/AU Optronics (AUO) took up 19%/14%/13%/12%/11% of the market share, respectively, by the area shipped of automotive display in 1H22. The Company’s medium-/large-sized automotive display shipments have continued to maintain the world’s first place since 2020, with a 1H22 market share of 22.6%, 10ppts higher than that of LGD which ranked second.
　　Company focus: Eyeing on the future, BOEVx adopts a three-step strategy backed by its strong production capacity and customer base.
　　1) Production line advantage: According to the Company’s 1H22 earnings meeting, BOE currently has eight production lines to support the production of automotive products and its total design capacity is about 540k pieces per month, providing sufficient capacity support to BOEVx. The full production capacity of the Company’s Chengdu automotive display production base in 2023 is likely to reach about 15mn pieces, and we estimate the corresponding output value will be about Rmb4.5bn based on the unit price of Rmb300/piece. The Company owns the world’s first Generation-8.5 production line for automotive display module production which presents significant cost advantages. By leveraging the production line advantages, BOEVx improves its proportion of large-sized screen shipments, focuses on promoting high-end display technology, and its high-end market share continues to increase. 2) Customer advantages: BOEVx is deeply engaged with tier-1 manufacturers and new energy vehicle (NEV) companies, and its product coverage continues to improve under its strategic relationship with its cooperators. According to the Company’s 1H22 earnings meeting, the Company’s product coverage in the top 20 domestic carmakers/domestic mainstream NEV manufacturers/its important partners in the module segment reached 42%/more than 50%/more than 60% as of 1H22. 3) Future strategy: BOEVx has launched a three-step strategy involving automotive display devices, display systems and smart cockpit, with the first as a mature business, the second being accepted by customers and achieving mass production, and the third to fuel massive growth momentum for the Company.
　　Potential risks: Intensified competition in the automotive display industry; less-than-expected downstream demand; disappointing expansion in customer base; disappointing capacity expansion; slower-than-expected R&D and commercialization of new products.
　　Investment strategy: Benefiting from the wider adoption of smart cockpit and BOE’s production capacity, customer base, and cost advantage, the global automotive display module leader BOEVx has achieved significant market share growth and robust earnings momentum. We are optimistic about the long-term growth prospects of BOEVx as a leading midstream manufacturer along the automotive display industry chain. Additionally, BOEVx stands well to benefit from the trend of multiscreen interaction and seize growth opportunities through integrated automotive display systems and smart cockpit. We forecast the Company’s 2022E-24E operating revenue to be HK$10.153bn/12.358bn/14.297bn, and attributable net profit (ANP) to be HK$585mn/705mn/831mn. We select the automotive electronics components leader, namely Lens Technology (300433.SZ), Token Sciences (300088.SZ) and Dongshan Precision (002384.SZ), and automotive system assembly business leader, namely Foryou (002906.SZ), Desay SV (002920.SZ), Joyson Electronic (600699.SH) and HAXC Holdings (300928.SZ) as comparable companies. Combining PE valuation and discounted cashflow (DCF) valuation methods, and taking into account the valuation level of the comparable companies, we give a target price of Rmb20 (on 22x 2023E PE). We initiate coverage with a “BUY” rating.