Core views:
　　As a global leading camera module supplier, Cowell has more than two decades of industry expertise and has established a deep presence along the A customer supply chain. We are optimistic about Cowell’s increasing market share and expansion of component/material supplies in the smartphone segment. Meanwhile, Cowell is proactively tapping into augmented reality/virtual reality (AR/VR) field and extending its presence in the vehicle-mounted laser radar (lidar) market, which could help open up headroom for growth in the future. We are optimistic about Cowell’s medium-/long-term growth rationale and initiate coverage with a “BUY” rating.
　　Abstract:
　　Company overview: The core camera module supplier of A customer, expanding to the vehicle-mounted and AR/VR products.
　　As a leading camera module supplier around the world, Cowell has deeply engaged in this field for more than 20 years, which enjoys an in-depth relationship with A customer. The Company’s operating revenue achieved a 14.3% CAGR in 2018-21. In 1H22, Cowell achieved operating revenue of US$405mn (+35.92% YoY). From the perspective of revenue composition, about 40% of its operating revenue came from A customer’s tablet products and 60% from its smartphones in 2021 per our estimates. With the increasing market share and expansion of component/material supplies in the smartphone segment, we are optimistic about the further growth of its smartphone business revenue. Meanwhile, Cowell is proactively tapping into AR/VR field and the vehicle-mounted lidar products, and we are optimistic about Cowell’s medium- and long-term growth prospects.
　　Traditional business related to A customer: Steadily increasing shares of front camera module and visible share improvement and product expansion.
　　We estimate that the market space of A customer’s smartphone camera module was US$13.6bn in 2022, with US$1.6bn for front camera module and US$12bn for rear camera module; and that of the tablet camera module was US$0.95bn in 2022, with US$0.45bn for front camera module and US$0.5bn for rear camera module. Cowell is the core front camera module supplier of A customer’s smartphone and tablet products, ranking first for the front camera module supply for A customer’s tablet products, and of top two in terms of the front camera module supply for its smartphones. Looking ahead to the future, we believe that the Company will likely benefit from the steady increase of the market share and expansion of component/material supplies in the smartphone segment. We estimate that the revenue from the traditional business in 2022-24 may be US$1.02bn/1.20bn/1.57bn (+28%/+18%/+31% YoY).
　　AR/VR: Visible increment in medium/long term.
　　We estimate that by 2026, the annual shipment of global AR/VR cameras will be nearly 0.3bn units, a 47% CAGR in 2022-26. We also estimate that by 2026, the global market space of AR/VR cameras will reach about US$2.2bn, a 53% CAGR in 2022-26, based on the value of US$6 for a single camera unit per Wellsenn VR’s report on Pico Neo 3 and given the subsequent gradual introduction of higher value RGB cameras and other products. As the main camera module supplier of A customer’s smartphones and tablets, Cowell has cooperated with the customer for many years, and may further become the camera module supplier of its VR products, thus contributing to the Company’s earnings increments. We estimate that the AR/VR business will contribute about US$40mn/160mn in revenue, respectively, in 2023-24.
　　Vehicle-mounted business: Tapping into the lidar assembly and benefitting from the high growth of the field.
　　Lidar is an essential sensor for high-level autonomous driving. For the absolute requirement of safety, LIDAR fulfils the requirement of diversity and redundancy in sensor configurations. We estimate that in 2022, the global shipment volume of passenger vehicle-mounted lidars was about 150,000 units, and the number will likely exceed 500,000 in 2023. We believe Hesai, RoboSense and Innovusion will still take the lead in shipments. Looking ahead to 2024, we expect that the global vehicle-mounted lidar shipments will double over 2023. Cowell has rich experience in the assembly and testing of lens, modules and optical components. Backed by Luxshare’s production accumulation and resources, Cowell has successfully entered into the assembly and factory testing business of RoboSense lidar. And RoboSense, by adopting the technical route of “905nm+ micro-electromechanical systems (MEMS)”, has obtained many orders from passenger vehicle (PV) manufacturers, and its main M series products have received orders for more than 50models from nearly 20 carmakers including Toyota. We are optimistic that Cowell will achieve performance growth with the rapid increase of the shipment volume of RoboSense. We expect that the revenue of the Company’s lidar business is likely to reach US$36mn/190mn, respectively, in 2023-24.
　　Potential risks: Deteriorating competitive landscape; less-than-expected downstream demand; slower-than-expected A customer’s smartphone optical specification upgrades; lower-than-expected new product yield; less-than-expected gross profit margin (GPM) of new products; slow development in advanced driver assistance system (ADAS); uncertain earnings due to unexpected changes in US-China relations.
　　Investment strategy: As a global leading camera module supplier, Cowell has more than two decades of industry expertise and has established a deep presence along the A customer supply chain. At this point in time, we are optimistic about Cowell’s increasing market share and expansion of component/material supplies in the smartphone segment. Meanwhile, Cowell is proactively tapping into AR/VR field, and extending its presence in the vehicle-mounted lidar market, which could help open up headroom for growth in the future. We are optimistic about Cowell’s medium-/long-term growth rationale. We forecast its 2022E-24E operating revenue to be US$1.02bn/1.27bn/1.92bn and attributable net profit (ANP) to be US$64mn/93mn/127mn, corresponding to EPS of HK$0.59/0.86/1.17, respectively. Combining PE and PEG valuation methods, and taking into account the valuation premium brought by the visible high growth of the Company’s VR/AR and vehicle-mounted lidar segments, we arrive at a reasonable target price of HK$22 and initiate coverage with a “BUY” rating.