The company's 2023Q3 subscription and channel transformation continued to advance smoothly. The share of subscription revenue increased to 35.5%, and the share of channel revenue increased to 34.83%. The company's integrated PDF product lines are PDF Editor Suite and PDF Editor Suite Pro, which continue to maintain a cost performance advantage over Adobe; all forms of overseas PDF editor products integrate AIGC to enhance the user experience with document summarization, content rewriting, and real-time interaction capabilities. In the domestic market, the company began vertical industry breakthroughs and continued to establish benchmark customers. We are optimistic about the broad scope of the PDF market and the strengthening of the company's own position in the industry. Maintain a “buy” rating.

Matters: The company released its three-quarter report for 2023. Q3 achieved revenue of 156 million yuan (yoy +10.35%), net profit of 14 million yuan, net profit from net income of 14 million yuan, and net profit from non-return of net profit of 24 million yuan. Losses were affected by factors such as subscription transformation and strong R&D investment, but the trend of increasing losses was clearly controlled compared to the past.

Subscription metrics are growing rapidly, and business transformation is advancing at an accelerated pace. The company's revenue growth was under pressure due to the subscription transformation. Revenue during the transition phase was confirmed in installments and pricing was lower than authorized. The company's subscription revenue for the first three quarters was 148 million yuan (yoy +70.92%), Q1 subscription revenue accounted for 30%, Q2 and Q3 increased to 35% and 35.5% respectively, and the subscription business ARR for the first three quarters was 213 million yuan (yoy +85.22%), all of which maintained rapid growth. As of Q3, the company's Editor product subscription renewal rate was 92%. The company promoted channel transformation. In the first three quarters, channel revenue increased 21% year on year, revenue share increased to 32.89%, and Q3 channel revenue reached 34.83%. Looking at the subregion, North America contributed 57.68% of revenue to the company's main market, the European market contributed 20.56% of revenue, and the Chinese market contributed 8.86% of revenue.

Continued investment strengthens product strength, and profits are under phased pressure. The company's Q3 sales expenses were 82 million yuan (yoy +6.42%), due to an increase in sales staff remuneration, commissions, advertising fees, sales platform fees, etc.; management expenses of 34 million yuan (yoy +35.09%), due to an increase in the number of management personnel and remuneration; and R&D expenses of 56 million yuan (yoy +14.45%), due to the company's increased investment in R&D, and an increase in R&D staff remuneration and professional service fees. The company incurred share payment expenses of 16.8794 million yuan in the first three quarters. After excluding share payment fees, non-net profit was -819.34 million yuan, a year-on-year decrease of 820.53%. This was mainly due to the company's continuous investment in R&D during the transition period between subscription and channels. Furthermore, the decline in net profit of joint ventures caused the company to lose 215.452 million yuan in investment.

The product line has been newly integrated and upgraded, and AIGC has strengthened penetration and payment. In May of this year, the company released new product lines, PDF Editor Suite and PDF Editor Suite Pro, priced at $129 or $159 per year, which have a cost performance advantage over Adobe; the new product line covers desktop, mobile, and cloud, adding electronic signature functions, and enhancing the product experience. In April, the overseas version of PDF Editor Cloud was the first to integrate AIGC, implementing eight major functions such as document summarization, content rewriting, real-time Q&A, text translation, and intelligent document analysis. In September, the PDF editor ushered in the 13th major version upgrade, and all forms of the PDF editor integrated AIGC. The annual recurring revenue of Adobe Document Cloud increased from US$49 million in 2012 to US$2,383 million in 2022. According to investor relations documents on Adobe's official website, the potential market size of the PDF document-related business could reach US$21 billion by 2023. The PDF market is huge, and the company has plenty of room for growth.

Strengthen the layout of vertical markets to help the digital transformation of various industries. The company pays close attention to PDF applications in various vertical industries in China, and has launched or developed related products based on PDF core technology. In the shipping sector, Tianhai Defense, a well-known and established shipping company, took the lead in using the Foxit ship drawing management system, and the company was able to establish a benchmark customer; in the home improvement field, the company launched Foxit public and commercial real estate solutions to help improve the efficiency of large-scale commercial real estate in tandem investment, engineering, and property. According to its announcement, the company plans to expand applications in securities, healthcare, law, supply chain, banking, publishing, education and other industries, provide intelligent document solutions, and serve the digital transformation of various vertical industries. In the first half of the year, the company's “Document Data Pickup Engine R&D Project” also combined technologies such as large language models and PDF document analysis in the planning to help tap commercial value in vertical markets.

Risk factors: Enterprise IT budgets are under pressure; corporate user payment conversion falls short of expectations; corporate product subscription transformation and customer acceptance fall short of expectations; industry competition is becoming increasingly fierce.

Profit forecast, valuation and rating: Based on the company's 2023 three-quarter report and the accelerated progress of the dual transformation, we adjusted the company's 2023-25 net profit forecast to -0.67/-0.58/ 039 million yuan (the original forecast was -0.71/-0.68/024 million yuan). Jinshan Office, Wanxing Technology, Taxyou Shares, and Guoneng Nissin were selected as comparable companies. The average PS in 2024 compared to Wind's unanimous expectations was 10.4 times. Considering the scarcity of the company in the PDF field and the relative pressure on the performance during the transformation phase, the company was given 15 times PS in 2024, corresponding to a target market value of 9.9 billion yuan and a target price of 109 yuan. Maintain a “buy” rating.