As the exclusive advertising agency for the core scenario of Huawei, the fundamentals have reached an inflection point. The company was founded in 1996. Based on technology accumulation in the fields of Internet search, big data, AI, IOT, blockchain, etc., the company is based on the two major businesses of Internet media and digital marketing. At the same time, in recent years, it has increased its investment and layout in Internet industry service services such as data technology, private brands, blockchain, and metaverse. In the first three quarters of 2023, the company achieved operating income of 2,080 million yuan, yoy -9.39%, net profit of 163 million yuan, yoy +37.23%. Looking at the third quarter of 2023, the company achieved operating income of 827 million yuan, yoy +8.82%, net profit of 76 million yuan, and yoy +89.15%. The fundamental inflection point has been reached.

Domestic and foreign demand continues to recover, and the AI model is empowering at an accelerated pace. 1) Overseas Internet media industry: According to PwC's forecast, the advertising business will be the first business category to reach $1 trillion in annual revenue by 2025. Meanwhile, GroupM predicts artificial intelligence technology may impact or involve at least half of ad spend in 2023. 2) Domestic digital marketing industry: In the first half of 2023, the recovery of the domestic economy boosted consumer willingness and led to a moderate recovery in the advertising market. According to QuestMobile statistics, the domestic Internet advertising market began to resume growth in the first quarter of 2023, and is expected to exceed 714.6 billion yuan for the whole year, an increase of 7.6% over the previous year. At the same time, the commercialization process of large-scale model applications is accelerating, and is gradually being applied to more segmented, more vertical, and more specialized fields.

Multiple product matrices are accurately reached, and those with strong traffic accumulation become stronger. 1) Diversified product matrix: SPE, a subsidiary of the company, has extensive international influence on multiple platforms, multiple vertical fields and various devices. It spans more than 30 content fields, has more than 1 million daily searches, and more than 2 million monthly active users. 2) High-quality media cooperation: In terms of top media at home and abroad, the company has maintained in-depth cooperation with Meta, Google, Yahoo, Bing, Amazon, Baidu, Tencent, etc.; in terms of emerging media, the company actively explores cooperation with media such as Huawei, Xiaohongshu, and Douyin. 3) Big business access model: In terms of the Internet media business, apps such as ASKAI that have already been launched are connected to ChatGPT, and a quick login function has been developed in the sidebar of its own browser Wave Browser; in terms of digital marketing business, the company cooperated with Baidu's “Wenxin Yi Yan” to explore ways to improve the effectiveness and efficiency of digital marketing activities; in terms of self-developed brand business, the company and Guoguang Electric jointly developed the world's first smart speaker, Vifa ChatMini, equipped with ChatGPT, has already started pre-sale on major e-commerce platforms such as JD 。

Huawei's deep cooperation has contributed to a new growth pole, and Hongmeng's capacity expansion will continue to empower it. 1) The company is the exclusive advertising agency of HUAWEI CLOUD's Jinghong Power (formerly HuaweiAds) in the domestic “game, social, tools, and travel” industry. The agency's advertising business mainly connects to various apps such as the Huawei Browser, Huawei Video, and Huawei Music, and is placed in various display areas such as lock screen, open screen, and information flow. Based on the good cooperation between the company and Jinghong Kinetic Energy in the early stages, the company provides high-quality services for the marketing activities of domestic advertisers on Huawei's overseas terminals. Currently, the scope of services has covered Europe, the Middle East, Africa, Latin America and the Asia-Pacific region. 2) In the first three quarters of 2023, the company's Huawei Jinghong Kinetic Energy advertising agency business achieved revenue of 845 million yuan, accounting for 40.16% of total revenue (20.09% of revenue for the same period); of these, the second quarter achieved revenue of 240 million yuan, gross profit of 1,252,84 million yuan, and the third quarter achieved operating income of 452 million yuan, achieving gross profit of 27.8796 million yuan, with significant quarterly increases in revenue scale and gross profit level. 3) In the future, with the release of the new version of Hongmeng OS and the increase in hardware side shipments such as the Huawei Mate 60 RPO, and promoting the full adaptation of the Hongmeng system, including the PC terminal, etc., it is expected to promote the launch of a new intelligent IoT, which is conducive to stimulating advertisers' demand for advertising in the Huawei terminal and Hongmeng application ecosystem and increasing the budget. The company will lean capital, manpower and other corporate resources to the advertising agency business in due course to give full play to its advantages, continuously expand the high-quality customer base, and provide customers with better services.

First coverage, giving a “buy” rating. Considering that the company is driven by Huawei terminal shipments, there is plenty of room for advertising space development and profit growth, we expect the company's 2023-2025 operating income to be 29.99/43.67/5.808 billion yuan, and net profit of 2.60/3.68/512 million yuan respectively, corresponding to the closing price of November 1, 2023, PE is 41.4/29.3/21.1 times. First coverage, giving a “buy” rating.

Risk warning: technology iteration falls short of expectations, economic downturn exceeds expectations, industry competition intensifies, and a single customer accounts for a relatively high share of revenue.