Incidents:

Dentsu Digital discloses its 2022 annual report and 2023 quarterly report. In 2022, the company achieved operating income of 9.872 billion yuan, an increase of 4.25% over the previous year; achieved net profit of 520 million yuan, an increase of 30.67% over the previous year; and achieved net profit of 525 million yuan after deducting non-return to the mother, an increase of 67.91% over the previous year. The 1Q23 company achieved operating income of 1,971 million yuan, an increase of 10.10% over the previous year; achieved net profit of 46 million yuan, a decrease of 20.67% over the previous year; and achieved net profit of 46 million yuan after deducting non-return mother's net profit, a decrease of 34.80% over the previous year.

Comment:

Baifei Electronics consolidated its performance, and 1Q23 profits were affected by accounting standards. During the reporting period, the company completed the acquisition of 100% of Baifei Electronics' shares in '22, and Baifei Electronics achieved net profit of 165 million yuan in '22, resulting in a year-on-year increase of 30.67% in the company's net profit. The company's performance increased steadily in 1Q23. Revenue and net profit increased 10.10% and 14.03%, respectively. However, the company's net profit and net profit after deducting non-net profit declined year-on-year, mainly due to the retroactive adjustment of accounting standards. In the same period last year, Baifei Electronics did not complete consolidation. Its current profit and loss must be included in non-recurring profit and loss, while 1Q23 Baifei Electronics' profit and loss were taken into account after deducting non-return net profit, affecting profit side performance. Overall, Baifei Electronics promised to achieve net profit of 197/237 million yuan in 23-24. As performance promises are gradually fulfilled, the company's performance is expected to continue to increase.

The business structure is upgraded, and the digital product business drives growth. Baifei Electronics is a leading supplier of digital modules and complete products for embedded special computers in China. The acquisition is expected to enhance the company's product design capabilities and improve the digital product layout. The company's digital product business achieved revenue of 622 million yuan in '22, an increase of 12.67% over the previous year, which is higher than the company's overall revenue level and will continue to improve the overall business structure. At the same time, the gross margin of the digital product business reached 60.21% in '22, which is significantly higher than the company's overall gross margin level of 19.19%. We believe that the digital product business is expected to become a new engine for the company's performance growth.

The company is expected to benefit from an increase in autonomous and controllable prosperity in the financial sector. Domestic substitution in the financial industry is accelerating. Relying on a broad customer base and deep operating experience in the financial sector, the company continues to develop business, and fintech business revenue exceeded 4.5 billion yuan in '22. At the same time, as one of the authorized units of the Financial Xinchuang Ecological Laboratory, the company participated deeply in localization adaptation and program design. In '22, the number of Xinchuang contracts signed was 1,777 billion yuan, an increase of 51.62% over the previous year. We believe that the company will continue to benefit from an increase in autonomous and controllable prosperity in the financial sector.

Investment advice: Give a “buy” rating. The company is expected to achieve operating income of 113.57/129.56/14.706 billion yuan from 2023 to 2025, an increase of 15.05%/14.08%/13.51% over the previous year; to achieve net profit of 6.39/757/886 million yuan, an increase of 22.82%/18.49%/17.10% over the previous year.

Risk warning: Domestic substitution is falling short of expectations, and market competition is intensifying.