Event: Yuanwang Technology released its 2023 annual report. In the first half of 2023, the company achieved operating income of 2,263 million yuan, an increase of 25.63% over the previous year; net profit attributable to mother - 208 million yuan, from profit to loss year on year; net profit after deducting non-attributable net profit - 227 million yuan, from profit to loss over the previous year. Among them, in the second quarter, the company achieved revenue of 1,161 million yuan, an increase of 16.30% over the previous year; net profit from return to loss over the previous year - 170 million yuan; net profit after deducting non-attributable net profit - 183 million yuan, from profit to loss over the previous year.

The business structure continues to be optimized, and short-term operating performance is under pressure. In the first half of 2023, the company's gross profit margin was 3.70%, a year-on-year decrease of 19.64pcts, a year-on-year decrease of 3.43%, a year-on-year decrease of 1.29pcts; the management expense ratio was 9.66%, an increase of 0.91 pcts over the previous year; and the R&D expense ratio was 1.82%, a year-on-year decrease of 0.11 pcts. In the first half of the year, the company achieved a GMV of about 6 billion yuan, an increase of about 9% over the previous year. Among them, in the second quarter, the company achieved a GMV of about 3.4 billion yuan, an increase of about 11% over the previous year, and an increase of about 33% over the previous year. 1) Changes in the business structure: The company invigorated the technical construction of live e-commerce, and the social e-commerce business was under pressure in the short term. In the first half of the year, it achieved revenue of 849 million yuan, a year-on-year decrease of 30.61%, a year-on-year decline of 30.61%, the share of revenue declined by 30.39 pcts to 37.49%, and the Internet advertising agency business achieved revenue of 1,079 billion yuan, a rapid increase of 213.14% over the previous year, accounting for 47.66% of revenue; 2) Short-term pressure on gross profit:

The growth in the advertising agency business led to an increase in traffic procurement costs. The gross margin fell 3.45 pcts to 2.26%. The social e-commerce Q2 company vigorously invested in the local lifestyle business with a lower gross margin, favoring live broadcasts towards local life, and the social e-commerce gross margin fell to 3.06%; 3) Footwear business liquidation: The company continued to promote the clearance of footwear inventory, and the average sales price of footwear products fell, and gross margin fell to 6.02% under macro factors; 4) Equity incentive amortization: The company amortized total equity incentive expenses of 33.1069 yuan during the reporting period.

“People and goods markets” actively invest and focus on AI to lay out the future. 1) Stars and anchors: In terms of traffic, on the one hand, the company has reached cooperation with hundreds of celebrities and organizations to achieve traffic reserves. On the other hand, the company continues to expand its IP resources. In 2023, H1 signed more than 50 artists, newly signed artists such as Zhao Yazhi, He Rundong, and Che Paul, and also launched Macy's China live broadcast debut. IP has a unique advantage in gaining domestic advantages. 2) Product supply chain side: The company's products include 10 major categories, more than 20,000 cooperative brands, and hundreds of thousands of SKUs. Among them, there are more than 200 brands with deep cooperation in the clothing accessories supply chain, and thousands more products per day, in order to sell in a spot model and break the current situation in the clothing futures industry with a high return rate. 3) Supply chain service development and layout: The company's offline X27 shopping mall is expected to open before and after the Asian Games, attracting more than 100 well-known domestic and foreign brands to set up physical stores. The online remote view cloud distribution platform is being tested, and the remote view model of the live e-commerce supply chain is gradually being rolled out. 4) Increased investment in the AI field: The “Remote View Cloud AIOS” system developed by the company is expected to achieve comprehensive intelligence of live broadcast room tasks; the virtual digital people the company and Xiaobing have collaborated with Xiaobing have reached industry-leading standards in terms of image, sound reproduction, and interactive questions and answers; AI models for the company's self-operated clothing brand have been trained and formed, and the results are already comparable to actual model shooting results. In the future, AI will continue to empower the company to reduce costs and increase efficiency.

Profit prediction: Yuanwang Technology continues to lead the live e-commerce circuit. It has all-round advantages in dimensions such as anchor matrices, content production, supply chain construction, channel deployment, and digital operations. AI construction continues to make efforts to reduce costs and increase efficiency, and non-standard service distribution matrices are expected to become a new engine for growth. We slightly adjusted our profit forecast. We expect the company's net profit to be 0.81/462/935 million yuan for 2023-2025, corresponding to the current stock price (August 31, 2023), PE is 118.1/20.7/10.2 times, respectively, maintaining the “increase in holdings” rating.

Risk warning: macroeconomic risk, industry policy risk, market competition risk, risk of loss of Internet technical personnel, risk of asset impairment