AI platform+solutions+services drive the intelligent transformation of enterprises

The fourth paradigm focuses on enterprise-level AI solutions for 10 years, starting with decision-making AI. The business includes forward-looking platforms and products (standardized software/hardware all-in-one) and application development (customized solutions).

We are optimistic about the company: 1) using major customers as a fulcrum to open up new industries and increase penetration in the covered industries; 2) restructure enterprise software with generative AI and improve customer experience and development efficiency with a solid foundation of enterprise service software. We expect the company to achieve operating income of 41.6/50.0/6.0 billion yuan in 2023-2025, compared to the company's average 2024E PS of 5.6x. Considering the broad industry coverage of the fourth paradigm, the customer base is mainly large enterprises, giving the company 6.8x 2024E PS, corresponding to a target price of HK$80.53 (HKD/RMB 0.90696), which provides “additional holdings” for the first time.

Using big customers as the fulcrum, continuously improving industry coverage, increasing the penetration rate within the industry, and increasing the revenue of benchmark users (Fortune World 500 companies or listed companies) is the main driving force for the company's growth. Benchmark users account for 55%/52% of revenue in 2022/1Q23, respectively. We believe that service benchmark users are a successful strategy for the company to develop new industries and increase penetration within the industry. Since the development of the service finance industry, the company has gradually established a wide range of industry coverage. Currently, industries contributing a large amount of revenue include finance (2022/1Q23, same: 16.9%/19.8%), energy and electricity (20.3%/11.4%), transportation (13.1%/30.0%), telecommunications (10.7%/7.4%), technology (9.7%/5.2%), and education (7.6%/6.5%). We believe that the company's broad industry coverage can avoid the risk of revenue decline caused by individual industry cycles, and at the same time, we are optimistic that the company will gradually expand into newly entered manufacturing, medical care, and retail fields.

The company's machine learning platform market share is leading. The enterprise software company that reconstructs enterprise software with generative AI models is a leading platform-centered AI enterprise service software company in China. In IDC 22, the market share of machine learning platforms in China reached 32.7%, ranking first. The big AI model is expected to reshape 2B software. The company launched the enterprise-level generative AI product “Shidou” in '23, and proposed a technical strategy to restructure enterprise software (AIGS, AI-Generated Software) with generative AI. Shikaku has cooperated with hundreds of companies in finance, retail, manufacturing, healthcare, logistics, operators, real estate, etc., and has been selected as one of the 15 “Advanced Application Cases of China's AI Big Model” published by the “MIT Technology Review”. We believe that the company's accumulated customer resources in the field of enterprise service software are a first-mover advantage in entering the AIGS market. We are optimistic that the company will combine generative AI with enterprise software to enhance the user experience and promote the commercialization of AI.

The first coverage gives a “gain” rating

Based on the continuous growth of the company's forward-looking platform and product and application development business, we expect the company to achieve operating income of 41.6/50.0/6.0 billion yuan (+35%/20% yoy) in 2023-25. We expect net profit to be 9.5/-3.7/-0.9 billion yuan (+42%/60%/77% yoy), adjusted to the mother net profit of -4.5/-3.3/-0.4 billion yuan (+9%/27%/89% yoy). The average 2024E PS of comparable companies was 5.6x. Considering the broad industry coverage of the fourth paradigm, the customer base was mainly large enterprises, which gave the company 6.8x 2024E PS, corresponding to a target price of HK$80.53, which provided “additional wealth” for the first time.

Risk warning: macroeconomic fluctuations; technology implementation falls short of expectations; market competition intensifies.