Incidents:

The company recently released its 2022 annual report. During the reporting period, the company achieved revenue of 1,743 million yuan, a decrease of 1.21% over the previous year; the net profit of the mother was 283 million yuan, a year-on-year decrease of 762.13%.

Key points of investment:

The share of digital effects traffic increased, and gross margin declined slightly due to the divestment of part of the game business.

The company continued to optimize its business structure in 2022. The digital traffic effects business achieved revenue of 1,562 million yuan, accounting for 86.18% of revenue, an increase of 18.41% over the previous year; the brand content traffic business achieved revenue of 185 million yuan, a decrease of 3.64% over the previous year; and the game business fell to 24 million yuan, a decrease of 92% over the previous year, mainly due to the company's divestment of Fantasyland at the end of 2021. The gross margin side fell 2.47pct to 16.75% year on year. The decline was mainly due to a decline in the share of high-margin gaming business; Guimu's net profit fell sharply year on year, mainly due to loss in the performance of the company's participating companies and preparation for large equity impairment. In terms of expenses, sales expenses increased 6.71% year on year to 123 million yuan, management expenses rate decreased 1.97 pct to 8.53% year on year, financial expenses were affected by previous exchange gains and losses and rose to -0.04 million yuan year on year; R&D expenses were -28.80% year over year to 63 million yuan; asset impairment losses during the reporting period were 155 million yuan, mainly due to impairment losses on long-term equity investments. Among them, the company accrued impairment losses of 107 million yuan on DotCUnited Inc.

The digital marketing business has become a pillar, and AI platforms help intelligent marketing. During the reporting period, the company's traffic and data business revenue accounted for 96%, and the transformation of the main business was basically completed.

The company's traffic marketing business is based on traffic platforms such as ByteDance and Kuaishou, embraces the development of AI technology, and creates a series of AI productivity tools for various marketing scenarios. “MetaSurfing - Yuanxiang Intelligent Cloud Platform” focuses on metaverse virtual person marketing, launched “Tianyu”, the leading domestic digital person IP, and collaborated with Yixin Entertainment to develop virtual artist identity together in the direction of identity virtual people and service virtual people; the “Mobile Application Distribution Intelligent Recommendation System” solves the problem of recommending experience and boosts CPA revenue growth; “Rubik's Cube Mix- “AIGC Short Video Intelligent Marketing Assistant” solved the problem of short video production and delivery efficiency. During the reporting period, it was used to produce more than 750,000 short videos, create 200,000 delivery plans every day, and interacted with media interfaces more than 8 million times on average. The “AI Content Marketing System” platform solves content marketing problems and realizes “thousands of people and faces” of brand content marketing through tag screening, intelligent matching, online monitoring, etc. In terms of brand marketing, the company has established deep cooperation with brand customers in the fields of insurance sales, 3C digital and accessories, maternal and child and cross-border health care.

Consolidate advantageous positions around data elements and innovate the “Park+Platform+Finance” model. The Shanxi Data Traffic Ecological Park invested and operated by the company is the first digital economic park featuring data elements in the country. Currently, the number of enterprises entering the park has exceeded 470, and the scale of data element circulation has exceeded 2.7 billion yuan, driving enterprises entering the park to generate more than 12 billion yuan in operating income. The influence of the Ecological Park continues to expand, which is expected to drive the company's performance growth collaboratively. In addition, the company has its own traffic platform, IceAssistant, which has the advantages of a mobile application distribution platform and massive user resources. It has formed 12 channels including the PC side of the Ace Mall and the mobile terminal of the Ace Mall. The cumulative number of registered users in the mall during the reporting period exceeded 2.02 million, forming an important segment of the company's data business.

Profit forecasting

The company cooperates closely with traffic platforms such as Byte and Kuaishou, has a deep marketing channel base, and is expected to reduce costs and increase efficiency and obtain more marketing traffic under the influence of AI technology on the marketing industry. We expect the company to achieve operating income of 2,043/23.13/2,521 billion yuan in 2023-2025, and achieve net profit of 0.61/1.02/138 million yuan, and achieve EPS of 0.04/0.06/08 million yuan. The dynamic PE corresponding to the stock price on April 14, 2023 is 168/100/74 times, covered for the first time, giving an “increase in holdings” rating.

Risk warning:

Technological development risks; increased market competition risks; macroeconomic risks.