3Q23 performance is lower than we expected.

The company announced 1-3Q23 results: income 959 million yuan, an increase of 17.6%; return to the mother net profit of 14 million yuan, down 46.5%; deducting non-net profit of 3 million yuan, down 66.8%, lower than we expected, mainly due to the weak overall consumption environment and the impact of new business investment. From a quarterly point of view, Q1/Q2/Q3 revenue is + 1.2%, respectively, compared with the same period last year. The non-net interest rate is-1.5%, 5.5%, 5.8%, respectively.

Trend of development

1. The revenue side picked up steadily, and revenue in the first three quarters increased by 17.6%. In the third quarter alone, the company's revenue increased by 35.0%, which was further higher than that of Q2 at a low base. From a business perspective, we expect the recovery of Q3's traditional business to remain relatively stable due to the weak overall consumer sentiment; in terms of new business, Douyin DP business in charge of Risheng Xingluo has performed better, expanding head beauty care brand customers such as Procter & Gamble Co, Helena and Koyan since the beginning of this year, and we expect Q3 to drive new business to continue the trend of rapid growth.

2. Under the influence of many factors, the gross profit margin has declined and the cost has been well controlled. The company's Q3 gross profit margin has also been reduced by 9.9ppt to 42.8%. We expect that in addition to changes in revenue structure, it will also be affected by increased costs such as information promotion, operating service fees and brand marketing. On the expense side, the company has strengthened expenditure and cost control this year to improve input-output efficiency. The total expense rate during the Q3 period has been reduced by 4.0ppt to 49.6%, of which the sales expense rate has been reduced to 19.9%, and the management + R & D expense rate has been reduced by 1.4ppt to 29.6%. Under the combined influence, the net interest rate in the third quarter was reduced by 7.9ppt to-5.0%, and the non-net interest rate was reduced by 5.5ppt to-5.8%.

3. The upgrading of the main business is progressing steadily, focusing on AI technology empowerment and new business development. 1) main business optimization and upgrading: the company's AIGC model training is progressing steadily. According to the company's disclosure in August, the model training base has been expanded from 6 billion parameters to 13 billion parameters. At present, the company has launched functions such as "AI purchase advice" and "AI purchase Guide" to assist users in consumption decision-making. In terms of community governance, AI technology improves content production efficiency, with machines contributing 33.1% of content in the first half of the year, an increase in 12.8ppt compared with the end of last year, and the auxiliary creation platform ZDM-Copilot is gradually open to all platform content creators. 2) New business development:

The company focuses on the layout of agent operation, consumer MCN and people-goods matching and other multiple plates to broaden the business growth curve. In terms of going out to sea, the company is in the stage of team formation and preparation, and plans to complete the landing of 1 or 2 countries next year. Continue to follow the company's AI technology landing and business development progress.

Profit forecast and valuation

Taking into account that the consumer environment is still in the process of gradual repair, and the impact of the company's new business investment, respectively, the net profit forecast for 2023-24 is reduced by 43% to 104 million yuan. The current share price is corresponding to 2023 Universe, which is 43 times as much as 29 times Pmax E in 24 years. Maintain the rating of the outperforming industry, taking into account the adjustment of profit forecasts and the medium-and long-term enabling prospects of the company's technology investment, and reduce the target price by 13% to 29 yuan, corresponding to 40 times Phand E in 2024, with 41% upside space.

Risk

Industry competition intensifies, new business growth falls short of expectations, macro environment is under pressure, and network security policy changes.