Incident: 1H23's revenue was RMB 1,433 billion, up 1.3% year on year. Among them, generative AI-related revenue rose sharply by 670.4% year on year, and revenue share increased from 10.4% of 1H22 to 20.3%; gross margin fell 20.7 pct to 45.3% year on year, mainly due to customer demand, hardware and AIDC-related costs increased as a proportion of revenue. Overall: 1) Gross profit declined year-on-year; 2) AI commercialization efficiency increased under cost reduction management, and OPEX expenses declined year-on-year. 1H23 net loss/adjusted net loss was RMB 31.43/2,393 billion yuan, which is 2.0%/6.7% narrower than 1H22, respectively.
The “big device+dock model” continues to be upgraded, building barriers to AI competition and supporting commercial output: 1) SenseCore AI's computing power scale of large devices continues to expand. The number of GPUs launched by AIDC increased from 27,000 at the end of March 2023 to about 30,000 in August, and the computing power scale increased from 5 exaFlops to 6 exaFlops. 2) The capabilities of the large pedestal model continue to iterate. In August 2023, the new model InternLM-123b completed training. The test results ranked second in the world in 51 well-known test sets with a total of 300,000 questions, surpassing GPT-3.5-Turbo and Llama-2-70b, focusing on upgrading the code interpreter and plug-in calling capabilities. 3) Promote the construction of an AI open source platform. Following the fact that some of InterN-LM-7b's training data, training code, and base model weights are open source and commercially supported, the IntEntLM-20B, which has more powerful capabilities and excellent calling tools, will also be open sourced in the near future. 4) The pedestal model is expected to accelerate the implementation of C-side applications through filing. According to a report by the Science and Technology Innovation Board Daily on August 31, Shangtang Technology passed the review and filing of the “Interim Measures for the Administration of Generative Artificial Intelligence Services”; “SenseHat”, a natural language application under the new model of Shangtang, is officially open to users.
The smart city sector contracted strategically, and the smart business sector focused on commercialization of the B-side model: 1) The revenue of the 1H23 smart city sector was 184 million yuan, down 57.7% from the previous year. It continued to promote transformation strategies, focus on first-tier and second-tier high-energy city customers, optimize revenue quality, and improve cash flow. 2) The 1H23 smart business sector has revenue of 854 million yuan, up 50.2% year on year. It has in-depth cooperation with customers in the fields of energy, finance, industrial manufacturing, etc., customizes major models in the industry, and focuses on the commercialization of the B-side model.
The smart living sector AIGC empowers the C-end scenario; the smart car sector continues to be mass-produced and delivered, and R&D revenue has declined: 1) 1H23 smart living sector revenue was 312 million yuan, up 6.7% year-on-year. AIGC applications such as “high volume,” “second picture,” “image like a shadow,” and “grid” empower customers in e-commerce, live streaming, traditional media, community platforms, etc.; AI SDK, AI sensors, AI ISP trinity, continuous mass production and delivery. 2) 1H23's smart car sector revenue was RMB 83.9 million, a year-on-year decrease of 30.5%. R&D revenue declined as some customer cooperation models changed from pure R&D services to front-end product cooperation. During the period, the “Exorcism” platform mass-produced and delivered 390,000 vehicles, added more than 5 million designated units, and accumulated more than 160 designated models. The UniAd algorithm won the best CVPR paper. It is based on the Transformer network architecture and integrates the detection, tracking, mapping, prediction and planning of autonomous driving into a framework that outputs an end-to-end pure visual autonomous driving solution. The company expects mass production in 23Q4.
Profit forecast, valuation and rating: Given that: 1) the smart city sector is still in the strategic contraction stage; 2) the business structure is still in the transition to generative AI, the 23-25 revenue forecast was lowered by 18%/30%/43% to 42.56/52.55/6.599 billion yuan; considering that the results of cost reduction and efficiency are yet to be further demonstrated, net profit for 23-25 was reduced to -53.09/-32.90/ -1,725 billion yuan (last forecast was RMB 3.390/19.59/384 million yuan). Considering that the Pedestal Model is expected to accelerate the implementation of C-side applications through filing, open up space for medium- to long-term revenue growth, and maintain “buy” ratings.
Risk warning: competition in the AI industry increases risks; commercialization progress falls short of expected risks; domestic and foreign policy risks.