The release of large industrial models and several related applications helped Innovator Qizhi solidify its leading position in “AIGC+ Manufacturing”.
The focus is on quality of growth and cash back in the context of a weak macroeconomic environment.
Reiterating the “buy” rating, the target price was lowered to HK$38.39 (corresponding to 5.6 times sales revenue in 2024).
The English version of this Hong Kong Stock Connect Report was published by Huaxing Securities (Hong Kong) at 6:30 a.m. on September 4, 2023. The Chinese version was reviewed by Xu Haohan of Huaxing Securities (Securities Analyst Registration Number: S1680520080002). If you would like to further discuss the views expressed in this report, please contact your Huaxing Securities sales representative.
AIGC technology platform focusing on the industrial sector: Taking advantage of the global AI development boom, Innovative Qizhi has launched artificial intelligence generated content (AIGC) business plans one after another. According to the company's recent announcement, since the first AIGC product was released in April, a total of three AIGC projects from Innovation Qizhi entered the delivery stage in the first half of the year. At the infrastructure level, in April of this year, Innovative Qizhi released the big language model “Qizhi Kong Ming InNoGC” (with over 13 billion parameters) (over 15 billion parameters). Management said that this big model added 2 billion parameters to the basic model, thereby incorporating specific industrial scenarios into the architecture. Current usage scenarios include generating business insights from manufacturing execution systems (MES) and enterprise resource planning (ERP) systems, building an industrial enterprise knowledge base, and providing AI-assisted industrial professional training. On September 1, Innovative Qizhi launched a series of products around its large industrial model (Alnno-15B), which has 150+ billion parameters, including a large model service engine and three generative AI application products (namely “Qizhi Mingrui ChatDoc,” “Qizhi Mingsu ChatBI,” and “Qizhi Minda ChatRobot”).
1H23 continues its growth momentum; 2H23 focuses more on the quality of growth. Total revenue of Innovation Qizhi 1H23 increased 43% year-on-year to 924 million yuan, of which revenue from vertical manufacturing scenarios accounted for 66% (compared to 52% compared to 1H22). Management emphasized that segments such as automobiles and technology are the key driving forces driving the company's revenue growth. Gross margin increased 0.5 percentage points to 32.4% year over year, and adjusted net loss fell from $59 million in 1H22 to $39 million. The number of receivables turnover days was extended from 139 days to 159 days, reflecting increased collection pressure due to weak macroeconomic conditions. Management said that given the current signs of a strong macroeconomic recovery, the company will focus on quality growth and cash receipts in the second half of the year. Therefore, we expect Innovator to take a more cautious approach in developing new customers and participating in projects.
As the company takes a more cautious approach to business development, we lowered our revenue forecast. Given the current macroeconomic environment and the long delivery cycle of Innovation Intelligence, we expect the company's new customer acquisition and revenue growth to slow. As a result, we lowered our 2023-25 revenue forecast by 17%-20%. We now forecast an adjusted net loss of 103 million yuan in 2023, and the company is expected to reach break-even in 2024 (unchanged).
Reiterating the “buy” rating, lowered the target price to HK$38.39 (previously HK$39.48): We used the P/S method to value Innovative Wisdom and switched the benchmark year to 2024. Our adjusted target price is based on 5.6 times sales revenue in 2024 (previously 7.3 times sales revenue in 2023), which is 50% off compared to the global average (previously 40%), reflecting that investors are taking a cautious investment attitude towards loss-making companies in the current interest rate environment and challenging Chinese macroeconomic context.
Risk Alerts: Improper data processing; failure to improve technology/AI solutions; export restrictions; ethical risks associated with AI; customer and business expansion risks; key personnel risks.