The company announced that 1H23 results fell short of our expectations
In 1H23, the company's total revenue was 1,433 million yuan, +1.3% year-on-year; net loss due to attribution was 3.12 billion yuan; adjusted net loss was 2,374 billion yuan, narrower than the same period last year by 1% and 5.6%, respectively. Affected by pressure on smart cities and businesses, performance fell short of expectations.
Development trends
With generative AI as the core, smart lifestyle businesses have blossomed more and more. 1) Smart Commerce: Revenue was 854 million yuan, +50% year on year, 481 customers as of 1H23, and ARPU per customer +60%.
2) Smart Life: Revenue was 312 million yuan, +6.7% year-on-year, accounting for 21.8% of the company's revenue. The AIGC implementation of the big model is mainly reflected in the smart lifestyle sector. Currently, breakthroughs have been achieved in the fields of digital human products, medical big language models, and smart terminals. 3) Smart cars: revenue of 84 million yuan, -30.5% year-on-year. Along with the shift in the cooperation model from R&D services to front-end products, part of the company's R&D revenue was converted to mass production revenue. Mass production revenue accounted for 43% during the reporting period, indicating that the product gradually matured. 4) Smart cities: With revenue of 180 million yuan, the company has maintained a steady contraction strategy for 2G business, which is -57.7% compared to the same period, accounting for 13% of the company's revenue. During the reporting period, the company focused on quality projects to optimize cash flow. The revenue share of Tier 1 and 2 cities increased to 64% compared to the same period last year.
1H23 repayment is still challenging and is expected to improve in the second half of the year. At the profit level, the company's 1H23 gross profit margin was 45.3%, -20.7ppt year on year. The slight decline in gross margin was due to fluctuations in customer demand during the reporting period, and the AI chip category and AIDC service category accounted for a high proportion. The company's cost control benefits are evident. The net loss ratio is 219.3%, which is 7.4 ppt narrower than the same period last year. At the repayment level, 1H23 trade receivables had a turnover of 459 days (vs. 1H22, 403 days), and impairment reserves accounted for 37.8% of trade receivables (year-on-year +14.4ppt), due to customers mainly in smart cities having a long account age.
Firmly embrace the AGI wave and open up space for imagination based on model abilities. The computing power layer, the SenseCore AI device continues to be upgraded, and the total computing power increased by about 20% from 5 ExaFlops to 6 ExaFlops at the end of March. According to a public statement from management, the company will continue to accelerate the expansion of computing power in the second half of the year, consolidating its original advantages from computing power to data dimensions. At the model level, the new model InternLM-123B has completed training, improved reliability and flexibility. It has 123 billion parameters and is also more prominent in the fields of accuracy, autonomous correction, code interpretation, and plug-in calls. It will be applied to SenceChat 3.0 and related APIs in September and officially launched on the market. (For the full review, see page 3)
Profit forecasting and valuation
Considering that the company's smart city business repayments were weaker than expected, we cut 2023/24 revenue by 16.9%/28.2% to 42.6/4.86 billion yuan. Taking into account the profit side of the company's AIGC, the adjusted net loss for 2023/24 narrowed by 8.7%/7.8% to 19.2/1.18 billion yuan.
Considering the downward shift in the valuation center of the AI industry, the target price was lowered by 53.5% to HK$2, corresponding to 11.6x2024e P/S. Currently, the stock price is trading at 8.9x 2024e P/S, with 33.3% upside.
risks
Technological innovation is faster than the pace of company development; industry competition intensifies; repayment risks.