The recycling business shrank, and subscription service revenue continued to grow at a moderate pace. In 2022, the company achieved revenue of RMB 1,664 million, an increase of 25% over the previous year; of these, revenue from device subscription services was 319 million, up 20% year on year, IT service revenue was 155 million, up 10% year on year, and revenue from recycling business was 1.19 billion yuan, up 29% year on year. The total number of major customers of the company was 1,387, an increase of 26% over 2021. In the device subscription service business, the number of long-term subscribers increased by 33% to 13,326 customers. In the IT service subscription business, the number of customers was 15121, an increase of 35% over 2021. In the first half of 2023, revenue was 822 million yuan, a year-on-year decrease of 3.7%; of these, equipment subscription revenue was 162 million yuan, up 8.1% year on year, IT technology subscription revenue was 77.2 million yuan, up 8% year on year; recycling business revenue was 582 million yuan, a year-on-year decrease of about 7.8%; the decrease in the company's recycling business volume is related to the reduction in the amount of equipment disposed of by upstream suppliers. At the same time, we believe that the company also intends to appropriately slow down the quantity of recycling business, ensure quality, and focus on subscription services.

In terms of gross margin, the company's overall gross margin in 2022 was 11.98%, down from 2021. Among them, the gross margin for device subscription services was 23.1%, which is basically the same as last year, and the gross margin for IT service subscription services was 71.1%. In the first half of 2023, the company's overall gross margin was 8.5%, down from the same period last year. We believe that gross margin for subscriptions and IT services is unlikely to drop; it should be related to fluctuations in the recycling business. The company's recycling business is a core competency of drainage. It enhances customer stickiness and converts customers. Profitability is not important.

In terms of profit level, in 2022, the company achieved an adjusted EBITDA of 285 million yuan, and the adjusted EBITDA rate was 17%; in 2022, the company reaped a good net profit amount of 99.94 million yuan. The main reason is that the change in financial liabilities measured at fair prices was 198 million yuan, and the company's actual net profit after adjustment was 10.93 million yuan. In the first half of 2023, the company's EBITDA was 134 million, up 5.2% year on year; net loss was 42 million, adjusted net loss of about 11.4 million.

The number of new customers has increased dramatically, laying the foundation for future revenue transformation, and awaiting an inflection point of acceleration. In the first half of 2023, the number of new subscribers to the company increased significantly compared to last year. The number of long-term device subscription customers increased by about 38.1% to 13,761, and long-term device subscription revenue increased 13.9%; while the number of IT technology subscription customers increased by 48.8% to 15,424. The scale of market expansion under the brand effect is initially apparent, but after the incremental transfer to inventory, it will take some time for the penetration rate to increase, and the IT equipment originally purchased needs to be gradually replaced after depreciation expires, so the revenue conversion rate for incremental customers and stock customers is not particularly obvious this year, but it is higher than last year's level. We expect that starting next year, the company's revenue conversion rate will clearly accelerate. In addition, a large amount of IT equipment purchased by the company in 2019 will reach a 5-year depreciation period next year, so it is foreseeable that as the scale effect of the company's equipment subscription service becomes apparent and the equipment depreciation period expires one after another, its gross margin will have a lot of room to increase, while IT service subscriptions will also increase as the proportion of long-term IT service subscriptions increases more and more, the number of devices serviced by a single person will drop, and gross margin will also increase. Therefore, we believe that the company's net profit will simultaneously increase significantly in the next few years.

Investment suggestions: We expect the company to achieve total revenue of 19.12 (down 20.5%)/24.17 (down 28.9%) /3,331 billion yuan in 2023-2025, with a 22-25 CAGR of 26% (the recycling business, which originally accounted for a large proportion of the company's revenue, will maintain a medium to low speed development, but equipment subscriptions and IT service subscriptions will maintain medium- to high-speed development); adjusted EBITDA is 3.69 (-12.9%) /5.62 (-19.3%) /861 million yuan, adjusted net profit It was 41.7 million (-10.7%) /149 million (+12%) /355 million yuan.

The company's DLM model combines the characteristics of the IDC industry (cabinet leasing), IT operation and maintenance services, and the SaaS industry. Therefore, we selected companies in these three industries to compare and evaluate using a weighted average method. Considering that the company is a leading manufacturer in the DLM field, its number of new customers is relatively fast, but it takes a certain amount of time for performance to be released (device subscriptions have a process of transferring inventory to incremental volume), so we gave the company 12.3 times (originally 12 times) EV/EBITDA (IDC) and 2.5 times (unadjusted) PS (IT operation and maintenance and SaaS). According to estimates, the company's valuation in 2023 was 4.64 billion yuan (-13.7%), corresponding to HK$5.0 billion, with a target price of HK$5.01 billion per share (-19.2) %). (The HKD/RMB exchange rate is calculated at 0.9284).

Also, we selected companies with similar revenue scale and gross margin level to Lingxiong Technology from comparable companies and compared them. Comparable companies had an average market capitalization of HK$6.5 billion, average revenue of RMB 1.5 billion in '22, and an average gross profit margin of 40%. Considering that Lingxiong Technology is a leader in the DLM field and has an industry first-mover advantage, industry competitive advantage, and huge development potential, we believe that the company's valuation is within a reasonable range.

Risk warning: The growth rate of the company's monetization business (equipment subscription+IT service) fell short of expectations, which in turn affected the level of EBITDA; the growth rate of the company's total revenue fell short of expectations.