3Q23 performance is lower than we expected.

The company announced 3Q23 results: revenue was 536 million yuan, down 5.0% from the same period last year, down 5.4% from the previous year; net profit from home was 22.01 million yuan, down 92.0% from the same period last year, turning losses into profits, which was lower than we expected. We think it is mainly due to higher credit impairment losses than we had expected.

Trend of development

Traditional business may decline year-on-year due to fierce summer competition, and continue to focus on business innovation. Under the background of fierce competition in IPTV, OTT and network video industry, the viewing habits of traditional cable large screen users continue to shift to mobile and intelligent large screen. We believe that the company is still facing problems such as the loss of users, the immaturity of innovative business and the insufficient supply of high-quality content resources, and the company's traditional cable TV business may still be under pressure in Q3, so we suggest paying attention to the progress of the company's innovative business model.

The gross profit margin was higher than the same period last year, and the credit impairment loss was 13.8 million yuan. 3Q23's gross profit margin was 13.7%, an increase in 4.1ppt compared with the same period last year. The rate of sales / management / R & D expenses of 3Q23 is 5.7%, 4.3%, 2.8%, respectively, and the rates of sales expenses and management expenses are respectively higher than the same period last year, and the rate of R & D expenses is basically the same as the same period last year. Due to the rise in the share price of Guiguang Network, a financial asset held by 3Q23, the company achieved a net income of 42.24 million yuan in fair value changes in the current period. However, considering that the operation in the lower reaches of the industrial chain is still in a gradual recovery, we expect the credit impairment loss related to 3Q23 accounts receivable to exceed the previous expected level, and the credit impairment loss is confirmed to be 13.8 million yuan in the current period.

Continue to pay attention to the implementation of policies in the radio and television industry. The company responds to the unified deployment of the General Administration and China Radio and Television to solve the problems of "doll charging" and complex operation, and promotes the research and development of new terminal products such as "quick small box", "TV fruit", TV stick and so on. On October 25, 2023, the Science and Technology Department of the State Administration of Radio and Television issued the application and approval draft of the industry standard "Technical requirements for Cable TV Business", "Technical requirements for IPTV Business" and "Technical requirements for Internet TV Business", which put forward requirements for start-up time, advertising display time and payment prompts. In the medium to long term, we believe that the effective management of the wired radio and television industry is expected to be gradually implemented to promote the orderly and high-quality development of the industry.

Profit forecast and valuation

Taking into account the loss of credit impairment and the pressure on traditional business in the fourth quarter, we lowered our net profit from 215 million yuan to 6.55 million yuan in 2023, leaving the profit forecast unchanged in 2024. The current share price corresponds to 27.4 times 2024 earnings. Maintain the neutral rating and target price of 7 yuan, corresponding to 25 times 2024 price-to-earnings ratio, which has 8.4% downward space compared with the current stock price.

Risk

The commercial progress of national grid integration and radio and television 5G has exceeded expectations, industry competition has eased, and user retention has improved.