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Vimicro International Corporation (Vimicro), founded in Beijing, China in 1999, is a worldwide leading fabless semiconductor company that designs, develops and markets proprietary embedded multimedia signal processing chips and solutions that enable multimedia applications for mobile phones over 2.5G/3G networks and PCs over broadband Internet. Its PC and embedded notebook camera multimedia processors have been incorporated into PC and embedded notebook cameras sold by leading PC and embedded notebook camera vendors, including Logitech. Its mobile phone multimedia processors have been used by leading international and China-based mobile phone brand owners, such as Samsung, LG, Lenovo Mobile, ZTE and Huawei, as well as leading mobile phone design houses based in China, including China Techfaith. PC and embedded notebook camera multimedia processors business, which is the main revenues source of Vimicro, contributed 37.1% of Vimicro's revenue in 2006. Image sensors business and Mobile phone multimedia processors business each contributed 32.4% and 23.9% of Vimicro's revenue in 2006, respectively.
Vimicro announced its financial report for the third quarter of 2007. Its earnings were in line with market consensus, while its revenue missed the market consensus. We think Vimicro's results demonstrate continued revenue mix shift towards higher margin products and the stabilizing average selling price (ASP) of Vimicro's PC camera processor products. However, we are concerned on the seasonal declines in its processors business in the next two quarters and continued weakness in its sensors business. Overall, we think its current stock fairly reflected intrinsic value of Vimicro. Therefore, we are initiating coverage with a Hold rating on Vimicro.
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