Core viewpoints

Although non-recurrent factors such as exchange gains and losses continue to disturb the company's apparent performance, we continue to be optimistic about the recovery of the company's core overseas marketing business. Looking at the fourth quarter, due to the low base in the fourth quarter of 2022, we expect the performance to improve significantly in the same period in 2023 under the trend of continuous recovery of overseas marketing demand.

In the medium and long term, the core value of the company's "responsibility for results" continues to strengthen. On the one hand, the company benefits from the accelerated expansion of domestic head comprehensive e-commerce customers overseas; on the other hand, the strong demand for independent station construction and drainage for its own platform by domestic small and medium-sized brands that benefit from a large and scattered number of small and medium-sized overseas brands, under this trend, the value of the company is prominent.

At the same time, we are also optimistic about the company's AI e-commerce application layout, which can not only combine the existing more than five thousand customers to form a closed loop of supply and demand of "AI products + customers", but also expand the increment of new small and medium-sized customers. The company is still investing in the research and development of AI applications, and it is recommended to pay attention to the updates of KreadoAI and the layout progress of subsequent products.

Event

The company released its three-quarter report in 2023, with operating income of 1.584 billion yuan (YoY-15.23%), net profit of 181 million yuan (YoY-27.79%) and net profit of 159 million yuan (YoY-33.20%) in the first three quarters.

In the third quarter, the company achieved operating income of 586 million yuan (YoY+5.63%), net profit of 61 million yuan (- 14.96% compared with the same period last year), and net profit of 52 million yuan (24.72% compared with the same period last year).

Brief comment

1. The layout of AI is continuous, and KreadoAI updates 7 major functions in September.

KreadoAI is the company's AI marketing content creation platform launched on July 12, 2023. After the launch of the products, we have successively built stations in foreign trade independent stations, platforms Shopline and Amazon.Com Inc Marketplace and other platforms on the shelves. KreadoAI can create content including AI digital population broadcast video, AI generation marketing copy, AI intelligent matting and other functions. On September 4, V2.0 was released with seven new functions, including human voice cloning, human image cloning, PPT file generation of digital population broadcast video, full-body appearance of digital human characters, change of digital population broadcast video background, video proportion setting, and ranking of digital people.

KreadoAI's user volume and revenue have been eye-catching. According to the record sheet of investor relations activities, the number of users and payment rates of KreadoAI have increased steadily since the release.

1) number of users: KreadoAI has more than 600000 registered users worldwide, covering 67 countries, and more than 1 million visitors per month, covering e-commerce, business travel, education, enterprise services and other scenarios.

2) Business model: KreadoAI revenue includes: 1) online SaaS subscription service revenue; 2) major customer system customization service revenue, according to the needs of major customers to provide a complete private system deployment plan for digital human video production. The annual fee for subscription services is 1680 yuan, and the total amount paid by the end of the third quarter is more than one million.

We believe that the AI application layout is expected to bring the following improvements to the company:

1) KreadoAI meets the marketing content creation needs of the company. In the process of advertising, a large number of material creation is needed, and the content creation platform based on AI is expected to produce content efficiently and at a low cost for the company to achieve efficiency and efficiency in the business process. 2) it can not only be realized with existing customers, but also form a closed loop of supply and demand of "AI products + customers". According to the announcement, the company has cumulatively provided overseas marketing solutions for more than 5000 advertisers in cross-border e-commerce, tool applications, games, manufacturing, new energy, education and other industries, so it has rich customer resources of various types. The layout of AI products such as KreadoAI is expected to transform the existing advertisers for the second time and complete the closed loop of supply and demand of "AI products + customers".

3) it can also expand small and medium-sized customers and improve the number of customer service. The company's original customers are BABA, Shein, Kudi Coffee, Miha Tour and other medium and large enterprise customers as the core, and KreadoAI is expected to help the company reach small and medium-sized customers and meet their demand for self-created marketing content, so AI products are expected to bring a large number of small and medium-sized customers to the company.

The company is still investing in the research and development of AI applications, and it is recommended to pay attention to the updates of KreadoAI and the layout progress of subsequent products.

2. Non-operating factors such as exchange gains and losses disturb the apparent performance growth. After the core business continues to improve compared with the same period last year, excluding the impact of exchange gains, the return to the mother has greatly increased compared with the same period last year. From an apparent point of view, in the third quarter, the company achieved revenue of 586 million yuan, an increase of 5.63% over the same period last year, but its net profit decreased by 14.96% to 61 million yuan over the same period last year, mainly due to large fluctuations in exchange earnings. Since the company and its customers are mainly settled in US dollars, the RMB depreciated sharply against the US dollar in the third quarter of 2022, resulting in an exchange gain of 41 million yuan, which is included in the financial expense, while in the same period in 2023, the RMB is relatively stable against the US dollar. The exchange gain is only 1 million yuan. Therefore, excluding the impact of foreign exchange earnings, the company's net profit in the third quarter of 2023 was 61 million yuan, an increase of 61.94% year-on-year and 12.37% month-on-month.

In addition to benefiting from the accelerated overseas expansion of BABA International Station / Lazada, Shein, Temu and other head comprehensive e-commerce customers, a large number of scattered overseas brand customers still have a strong demand for the company's "responsible for results" marketing services:

1) in our previous report, we said that on the one hand, overseas e-commerce platforms such as Amazon.Com Inc banned Chinese merchants, on the other hand, overseas consumers' acceptance of independent stations was significantly higher than that of domestic consumers. The two factors jointly promote the rising demand of domestic brands for the construction of independent stations.

2) although the overseas competitiveness of the domestic e-commerce platform has obviously improved, the demand for the construction of independent stations of domestic brands continues, and the demand for marketing services is still strong. Take Temu as an example, the platform adopts full hosting mode, which is responsible for store operation, warehousing, distribution, return and exchange, after-sales service and other links, and has a say on the retail price, thus weakening the brand's control over the sales price of products, as well as gross profit margin. At present, Temu, TikTok Shop and AliExpress all adopt the full escrow mode; the operation mode of Shein with high control over the production side is similar to the full escrow mode in the final impact on the manufacturer / brand.

Therefore, for domestic brands, the demand for independent station construction is stronger for those who are willing to establish brand loyalty and control gross profit margin. Therefore, under this trend, the value of "effect-oriented" marketing service providers such as Yi Diantian for various platforms / brands is highlighted.

Continuous R & D investment promotes the upgrading of the algorithm, the effect is emerging, and the gross profit margin remains high. In the first three quarters of 2023, the company's gross profit margin was 24.23%, up 2.09 pct from a year earlier; in the third quarter alone, the company's gross profit margin was 24.64%, an increase of 3.82pct over the same period last year. According to the official account, in the first quarter of 2023, the company began to gradually implement five technical solutions developed by the internal team, such as multi-cloud traffic scheduling, algorithm logic reconstruction, CPU multiplexing, self-built StarRocks data warehouse, and the transformation of computing ARM. Through practice, the cost reduction effect has gradually emerged, promoting the gross profit margin to remain high.

Exchange gains led to a short-term increase in expense rates during the third quarter. In the first three quarters of 2023, the total period expense rate was 9.54%, an increase of 3.62pct over the same period last year; in the third quarter alone, the total period expense rate was 11.07%, an increase of 6.91pct over the same period last year, of which the sales expense rate was 1.95%, unchanged from the same period last year; the management expense rate was 6.71%, an increase of 2.10pct over the same period last year; and the R & D expense rate was 3.39%, a decrease of 0.85pct over the same period last year Financial expense rate due to large fluctuations in exchange earnings, the RMB depreciated sharply in the third quarter of 2022, so the company included 41 million yuan in exchange earnings, but only 1 million yuan in the same period in 2023, so the financial expense rate narrowed 5.61pct to-0.98% compared with the same period last year.

Investment advice: although non-operating factors such as exchange gains and losses continue to disturb the company's apparent performance, we continue to be optimistic about the recovery of the company's core overseas marketing business. Looking at the fourth quarter, due to the low base in the fourth quarter of 2022, under the trend of continuous recovery of overseas marketing demand, we expect the performance of the same period in 2023 to improve significantly: at the end of 2022, overseas brands are subject to production stoppage and logistics disruptions, marketing budgets are greatly reduced, suppressing the company's performance. However, in the fourth quarter of this year, the overall business environment at home and abroad is good, and with the year-end promotion of overseas Black 5 and Christmas, the marketing budget of the brand will significantly pick up compared with the same period last year, and the company is expected to benefit.

In the medium and long term, the core value of the company's "responsibility for results" continues to strengthen. On the one hand, the company benefits from the accelerated expansion of domestic head comprehensive e-commerce customers overseas; on the other hand, the strong demand for independent station construction and drainage for its own platform by domestic small and medium-sized brands that benefit from a large and scattered number of small and medium-sized overseas brands, under this trend, the value of the company is prominent.

We are also optimistic about the layout of the company's AI e-commerce application. On the one hand, combined with the existing more than five thousand existing customers, to achieve "AI products + customers" closed-loop supply and demand; on the other hand, AI products are also expected to bring more small and medium-sized customers to the company. At present, the company is still investing in AI application upgrade and research and development, and it is recommended to pay attention to the update of KreadoAI and the layout progress of subsequent products.

We estimate that the company's return net profit from 2023 to 2024 will be RMB 263,000,000, an increase of 0.5 percent over the same period last year. 15.64 percent of the closing price on October 31 corresponds to a PE of 31.69pm 27.40x.

Risk analysis.

The risk of delay in KreadoAI version update, the risk that KreadoAI's user growth falls short of expectations, the risk that KreadoAI's revenue growth is not as expected, the risk that KreadoAI's cost reduction, efficiency improvement and quality increase are not as expected, the risk that Bing's traffic and channel value growth is not as expected, the data security risk brought by generative AI, the risk of deterioration of the global economic environment, the anti-monopoly and regulatory risk of the Internet industry at home and abroad, the risk of illegal operation of first-level media agents, The increased risk of competition, the risk of budget reduction of head advertisers, the risk of less than expected expansion of brand customers, the risk of decline in the prosperity of cross-border e-commerce, the risk of decline in game scenery, the risk of rising costs of raw materials and cross-border logistics, and the risk of brain drain.