Core viewpoints

In the first half of the year, on the one hand, the company successfully expanded the head game manufacturer Miha Youyou by ploughing the brand out to sea; on the other hand, it benefited from the market share and channel value of Bing. Therefore, after excluding exchange gains and losses, the company's second-quarter results achieved higher-than-expected growth.

Looking forward to the second half of the year, although the exchange gains and losses have a certain disturbance to the company, we are optimistic that the marketing business will continue to pick up at the beginning of the third and fourth quarters, and it is recommended to pay attention to the two major version updates of KreadoAI. 1) fundamentals: the recovery trend of offshore budgets of e-commerce customers and AIGC-enabled game customers under the recovery of consumption is expected to continue, and the company is expected to continue to benefit from it. 2) KreadoAI version update: focus on the two major version updates of KreadoAI at the beginning of September and the end of November, on the one hand, the company's own physical efficiency will continue to show, on the other hand, it is expected to continue to drive the growth of B-end customers' user volume and revenue.

Event

The company issued a performance report that in the first half of 2023, the operating income was 998 million yuan (YoY-24.03%), the return net profit was 119 million yuan (YoY-32.99%), and the non-return net profit was 106 million yuan (YoY-36.72%).

In the second quarter alone, the company achieved operating income of 525 million yuan (YoY+0.24%), net profit of 78 million yuan (YoY-8.10%), and net profit of 69 million yuan (YoY-12.70%).

After excluding the impact of exchange gains and losses in the second quarter, the company achieved a net profit of 54 million yuan (YoY+20.05%,QoQ+16.36%).

Brief comment

1, deducting the exchange profit and loss exceeding the expected profit, expanding the head game manufacturer Miha you deducting the exchange profit and loss exceeding the expected repair. The company's performance is recovering obviously. according to the company's announcement, the company's profit side in March alone has returned to the level of the same period last year. In the second quarter, after deducting the impact of exchange gains and losses, the company realized a total profit of 66 million yuan, an increase of 26.17% over the same period last year and an increase of 22.00% over the same period last year; the net profit returned to its mother was 54 million yuan, up 20.05% from the same period last year and 16.36% from the previous year.

The reason for the better-than-expected recovery comes from two aspects:

1) the full-service brand went out to sea and successfully expanded the head game factory: according to the announcement, the company launched an advertisement on Bing for Miha you in the first half of the year, achieving a major breakthrough in the game track. In addition, the company has reached cooperation with a large number of Chinese overseas brands, including 3C enterprises such as Green couplets and transmissions, beauty make-up brands such as Natural Hall and Flower Wonderland, new consumer goods brands such as Kudi Coffee, as well as energy storage distributed photovoltaic and new energy vehicles. We believe that the diversification of the industries to which customers belong can enable the company to fully tap the overseas marketing budgets of different industries and drive the company's performance to achieve sustained growth.

2) increase the market share and channel value of benefiting Bing. The company became an agent for Bing as early as 2021. According to the investor relations activity record table, the amount of cooperation between the company and Bing increased by 200% in the first half of 2023 compared with the whole of 2022, and has been exploring with the Bing team around the advertising algorithm and new advertising forms after AI is blessed. With the increase of Bing's market share and the deepening of cooperation with Microsoft Corp, the company is optimistic that the amount of cooperation with Bing is expected to continue the trend of rapid growth.

Looking forward to the second half of the year, cross-border e-commerce customers affected by the consumption recovery in the first half of the year, as well as AIGC-enabled game customers, have shown a better trend of recovery in offshore marketing budgets, which is expected to continue. Although the exchange gains and losses have a certain disturbance to the company, we are optimistic that the marketing business will continue to pick up since the beginning of the third and fourth quarters.

2. Launch AIGC digital marketing creation platform KreadoAI, and there will be two major updates in the second half of the year. KreadoAI is the company's first AIGC digital marketing creation platform. KreadoAI was officially launched on July 12 and has been launched on platforms such as SHOPLINE and Amazon Cloud Technology Marketplace. KreadoAI has four major functions: 1) AI digital human: to achieve AI digital population broadcast video, 1:1 real digital human cloning, voice print cloning; 2) AI model: for clothing e-commerce customers to generate AI product display pictures of different skin colors, ages and countries; 3) AI tools: provide AI to generate marketing copy, AI text dubbing, AI intelligent matting, etc. 4) AI creative assets: provide marketing launch data analysis and popular style content analysis.

According to the company, KreadoAI has achieved remarkable performance in terms of user volume and revenue. According to the investor relations activity record table, with the iteration of product features in July and August, the number of KreadoAI users and payment rates show a steady upward trend.

1) number of users: at present, the number of registered users of KreadoAI has exceeded 400000, and the number of UV (unique visitors) has exceeded 1 million. In the absence of marketing promotion, the company has added nearly 10,000 registered users every day. Customers are distributed in e-commerce shopping, business travel recommendation, application download, education and training, enterprise services and other fields.

2) Revenue: KreadoAI revenue includes: 1) online SaaS subscription service revenue; 2) key customer system customization service income, according to the needs of major customers to provide a complete private system deployment plan for digital human video production. At present, the total revenue of products has reached millions.

The function of KreadoAI is reflected in three aspects: reducing cost, increasing efficiency and improving quality. According to the company announcement, with the help of AI, 2Q23's gross profit margin increased by 0.04pct over the same period last year, with an increase of 3.20pct month-on-month; net profit margin increased by 0.06pct. At present, KreadoAI has covered most of the design teams within the company, to a large extent to achieve cost reduction, quality improvement and efficiency.

1) cost reduction: the digital human ability of KreadoAI reduces the material cost of foreign models by 86%. The AI model function reduces the cost of e-commerce merchandise drawings by 83%.

2) efficiency: AI marketing copywriting improves the creative productivity of the design team; tools such as AI text dubbing and AI intelligent matting increase the efficiency of the designer's work by more than 5 times; the AI e-commerce video advertising tool in the internal test has achieved 10 times the production efficiency of advertising materials, and now it has carried out cooperation with the head e-commerce and plans to launch by the end of October.

3) quality improvement: in the leisure game track, we can efficiently produce digital advertising materials for customers.

There are two major version updates in the second half of the year, and combined with the gradual opening of the buying volume and promotion strategy, the number of users and revenue are expected to continue to grow. According to the announcement, KreadoAI will launch an online customization service for digital human image and voice cloning in early September to increase the unit price of customers. The company's plans for the second half of the year mainly focus on the improvement of the image of digital people and the improvement of accuracy, including the launch of a series of customized services. We expect that with the updates of the two major versions in early September and the end of November, and as the company gradually launches its buying and promotion strategy, there is still a lot of room for KreadoAI user volume and revenue growth.

3. Financial situation

1) AI technology led to the year-on-year and month-on-month growth of gross profit margin in the second quarter. In the first half of 2023, the company achieved a gross profit of 239 million yuan (YoY-19.73%) and a gross profit margin of 23.99% (compared with the same period last year + 1.29pct); in the second quarter, it achieved a gross profit of 134 million yuan (YoY+0.38%) and a gross profit margin of 25.50% (compared with the same period last year + 0.04pct). The company realized the year-on-year and month-on-month improvement of gross profit and gross profit margin in the second quarter, mainly due to the AI technology enabling the company to reduce costs and increase efficiency.

2) expenses: financial expenses offset by foreign exchange gains against the increase in management and R & D expenses. The 1H23 period expense rate is 8.64% (compared with the same period last year + 1.98pct), of which the 2Q23 period expense rate is 6.21% (compared with the same period last year + 1.06pct). Because the company settled with its major customers in US dollars, the appreciation of the US dollar against the RMB slowed in the second quarter of 2023 compared with the same period last year, resulting in a decrease in exchange earnings compared with the same period last year.

Investment advice: looking forward to the second half of the year, although the exchange gains and losses have a certain disturbance to the company, we are optimistic that the marketing business will continue to pick up since the third and fourth quarters, and it is recommended to pay attention to the two major version updates of KreadoAI. In terms of fundamentals, in the first half of the year, both e-commerce customers under the recovery of consumption and AIGC-enabled game customers have shown a trend of better sea budget recovery. Looking forward to the second half of the year, we believe that this trend will continue and the company will benefit from it. At the same time, focus on the two major version updates of KreadoAI at the beginning of September and the end of November, on the one hand, the company's own physical efficiency will continue to show, on the other hand, it is expected to continue to drive the growth of B-end customers' user volume and revenue.

We estimate that the company's net profit from 2023 to 2025 will be RMB 265,3211,410 million, an increase of 1.10%, 21.13%, 27.73%, and 22.43x, respectively, corresponding to the PE on August 11, 2023, maintaining the buy rating.

Risk analysis.

The risk of delay in KreadoAI version update, the risk that KreadoAI's user growth falls short of expectations, the risk that KreadoAI's revenue growth is not as expected, the risk that KreadoAI's cost reduction, efficiency improvement and quality increase are not as expected, the risk that Bing's traffic and channel value growth is not as expected, the data security risk brought by generative AI, the risk of deterioration of the global economic environment, the anti-monopoly and regulatory risk of the Internet industry at home and abroad, the risk of illegal operation of first-level media agents, The increased risk of competition, the risk of budget reduction of head advertisers, the risk of less than expected expansion of brand customers, the risk of decline in the prosperity of cross-border e-commerce, the risk of decline in game scenery, the risk of rising costs of raw materials and cross-border logistics, and the risk of brain drain.