Overview of events

On August 30th, the company released its semi-annual report of 2023. 23H1 achieved operating income of 931 million yuan (yoy+67.9%), net profit of 114 million yuan and non-return net profit of 65 million yuan. Both Heiku and Feifei achieved a turnround from losses to profits. Among them, 23Q2 realized operating income of 509 million yuan (yoy+62.6%,qoq+20.4%) and net profit of 70 million yuan (qoq+59.0%) deducting 23 million yuan (qoq-45.9%) of non-return net profit.

Analysis and judgment

The performance is in the range of forecast, in line with expectations, and the increase in revenue year-on-year is mainly due to the increase in completed projects. In the first half of 2023, with the full recovery of normal operation of economy and society, the offline experience economy recovered obviously, the cultural tourism and consumer demand were released rapidly, and the customer demand of the company gradually recovered. We believe that the project progress of the company in the first half of the year is orderly, the pace of revenue recognition (the conversion progress of on-hand orders) and the progress of newly signed orders are accelerated, and the output value is gradually released.

1. Gross profit margin and net profit margin increased year-on-year when pulled up by the income side. 23H1's gross profit margin and net profit margin are 33.45% (yoy+11.29pct) and 12.27% (yoy+25.43pct) respectively. We believe that the larger year-on-year increase in profit is mainly due to the larger increase in revenue, while the relative rigidity of costs (such as staff wages). The sales expense rate, management expense rate and R & D expense rate of 23H1 Company are 5.94% (yoy-2.19pct), 5.05% (yoy-1.94pct) and 3.71% (yoy-2.48pct), respectively. The slight decrease in the expense rate during this period indicates that the expense control is good. The net interest rate of 23Q2 and the net interest rate of deducting non-return are 13.79% (yoy+32.07pct,qoq+3.34pct) and 4.47% (yoy+23.96pct,qoq-5.47pct) respectively, and the profit end has improved compared with the same period last year.

2. Operating cash flow remains stable as a whole. Operating cash flow has a quarterly periodicity, generally Q1, Q3 is negative, Q2, Q4 is positive, the caliber of the whole year is positive. The net cash flow generated by the operating activities of 23Q1 and 23Q2 is-205 million yuan (yoy+ 83 million yuan) and-23 million yuan (yoy- 107 million yuan) respectively. We believe that the company's cash flow did not deteriorate significantly in the first half of the year, and we are optimistic about the progress of order recovery and the release of demand for innovative businesses such as 3D digital content, immersive VR travel, exhibition operation and so on. It is expected that the annual caliber operating cash flow will continue to be positive with high certainty.

3. Accounts receivable make full provision for bad debts, and the volume of monetary funds remains high. Due to the particularity of the industry, customers and settlement cycle, the company's settlement and recovery are usually concentrated at the end of the year. With the continued efforts of the policy side in the second half of the year, the company will further strengthen project settlement and recovery. 23H1 Company's "accounts receivable / bills + contract assets" totaled 1.717 billion yuan (yoy+ 190 million yuan). We believe that the company's total accounts receivable did not accumulate significantly, and the company fully calculated a total credit impairment loss of 97.4248 million yuan (mainly accounts receivable) in the first half of the year based on the principle of prudence. The risk is controllable as a whole and has little impact on annual profit expectations. 23H1's "accounts payable / notes + contract liabilities" and monetary funds are 1.857 billion yuan (yoy+ 154 million yuan) and 1.5 billion yuan (yoy+ 120 million yuan) respectively. We believe that the company is relatively healthy in terms of cash flow and account period.

The overall domestic macroeconomic situation has stabilized, the market has gradually returned to normal, and the superimposed cultural tourism and consumer demand have been released rapidly. we believe that the company's performance is expected to recover in the second half of the year, and the annual performance is expected to be low before and then high. The demand for newly signed orders shows a pick-up, and continue to pay attention to the revenue recognition situation. Income and new signatures depend on the project itself. If the amount recognized by a single project is large, it may lead to income fluctuations, so the period of income recognition should be lengthened.

1. From the perspective of performance confirmation, there are sufficient orders on hand. According to the China News, thanks to the sustained recovery of the offline experience economy and new market opportunities brought about by urban renewal, the total amount of new orders signed by 23H1 Company is about 761 million yuan (yoy- 184 million yuan,-19.47%). As of June 30, 2023, the balance of existing orders is 4.636 billion yuan (315 million yuan less than that at the end of 2022). The reserve of existing orders is abundant. According to the 22-year return net interest rate of 3.93%, the corresponding net profit reserve is 182 million yuan. At the same time, the company's provision for bad debts based on the principle of prudence has room to recover in the future.

2. From the caliber of the newly signed order:

(1) the warming trend of newly signed orders is obvious, and the demand is expected to be released in the second half of the year. According to the caliber of winning orders we have tracked (incomplete statistics), the growth rate of newly signed orders in the first half of 2023 has increased significantly since March. Among them, the orders with Q1 exceeding 100 million winning amount include the construction project of the wisdom exhibition hall of Zoucheng Gaojing New Medicine Incubator Center (120 million yuan), and the orders with Q2 exceeding 100 million winning amount include the general contract of the old power plant industrial museum project (secondary) (180 million yuan). From July to August 2023, the company has successively won the contract for many projects, such as the Chen project of the Yellow River Xuanhe Culture Exhibition Park, the space software service of Hangzhou Asian Games Museum, and the production of naked 3D content in Hangzhou West Railway Station. the total newly signed order is about 450 million yuan. We believe that the company relies on Chinese traditional culture and uses digital art, immersive experience and meta-cosmic cutting-edge technology to develop a new type of cultural digital experience space. After the formal contract is signed and implemented smoothly, the project will have a positive impact on the company's business performance.

(2) the company makes continuous investment and layout around the areas of VR/AR technology, IP resources, immersive experience and exhibition operation to cultivate the second curve of business growth. In the first half of 2023, the company assisted the holding of major events such as Xinhua News Agency emerging Media Industry Integration and Development Meta Universe Conference, South Korea Gwangju Biennale "International Meta Universe Exhibition", Oriental Fantasy Meta Universe Science Fiction Conference and other major events. It was selected into the 2023 Hurun China Meta Universe potential Enterprise list. The company participated in the creation of Hangzhou Tonglu Fangyu empty Township Suwen Chuang complex, Nanjing "Yi Wei du" Dharma Grottoes Light and Shadow Art Museum, Quzhou Tianwang Pagoda Immersion Art Museum, Yangquan memory 1947 Cultural Park and other projects have become local network celebrities sign-in places and minority cultural travel destinations, fully reflecting the company's strength in cultural digitization and scene construction, as well as in space operation and IP content drainage. The company was also selected as one of the top 2023 Chinese literature and travel enterprises. We believe that in the development process of meta-universe, G-side / B-side projects are expected to take the lead in producing large-scale economic benefits, the company's traditional business benefits from the demand side continues to be strong in the short term, and the fundamentals are expected to remain excellent.

Investment suggestion

Since March 2023, the company's bid-winning orders have recovered rapidly. based on the optimistic demand for the company's fundamentals and future 3D digital content, immersive VR travel, exhibition operation and other projects, we estimate that the company's net profit from 2023 to 2025 will be 304 million yuan, 399 million yuan and 506 million yuan respectively, an increase of 359.6%, 31.5% and 26.7% respectively, and the corresponding EPS is 0.51,0.67,0.85 yuan respectively. The corresponding valuations are 24 times, 18 times and 14 times respectively, maintaining the "buy" rating.

Risk hint

The metacosmos industry is not developing as expected, the policy support is not as strong as expected, the demand for new cultural infrastructure is lower than expected, the intensity of competition in the industry is intensified, the impact of the epidemic is longer than expected, the company's newly signed orders are less than expected, and the company's payback is lower than expected. there are risks such as loss of bad debts, differences between statistical orders and actual orders leading to distortion of analysis conclusions.