2023 results slightly exceeded expectations, maintaining target price of HK$80.53

The fourth paradigm released its 2023 results, with revenue of 4.20 billion yuan, up 36.4% year on year, slightly higher than Huatai's forecast of 4.16 billion yuan; net loss to mother was 9.1 billion yuan, down 44.8% year on year, better than Huatai's net loss of 950 million yuan; adjusted net loss was 420 million yuan, down 17.6% year on year. The company's performance growth was mainly due to strong revenue growth (68%) from the Prophet AI platform. We continue to be optimistic about the company:

1) Use major customers as a fulcrum to open up new industries and increase penetration in industries already covered; 2) Restructure enterprise software with generative AI with a solid foundation of enterprise service software to improve customer experience and development efficiency. We maintain our 2024/2025 revenue forecast of $50.0/6.0 billion, and expect 2026 revenue to reach $7.18 billion. The average 2024E PS of comparable companies is 5.5x. Considering the broad industry coverage of the fourth paradigm, the customer base is mainly large enterprises, which give the company 6.8x 2024E PS, maintain the target price of HK$80.53 (HKD/RMB 0.90696), and maintain the “gain” rating.

The revenue growth rate of the Seer AI platform is impressive

The company's revenue in 2023 was 4.20 billion yuan, up 36.4% year on year, of which: 1) Prophet's AI platform business revenue was 2.50 billion yuan, up 68.0% year on year, benefiting from growing AI market demand and the company's big model and generative AI capabilities empowering products; 2) SHIFT intelligent solutions business revenue of 1.28 billion yuan, up 7.4% year on year; 3) AIGS service revenue was 420 million yuan, up 4.7% year on year.

The company's gross margin in 2023 was 47.1%, down 1.1 pp year on year, mainly due to business penetration into new fields and an increase in new user cases, which led to an increase in hardware and technical service fees as a percentage of revenue.

Continue to expand the advantages of major customers, and the formula says that the big model is progressing smoothly

In 2023, the company continued to expand its large user advantage. The total number of users was 445 (+9% yoy), of which the number of benchmark users was 139 (+34% yoy), the average revenue of benchmark customers was 18.38 million yuan (+3% yoy), and the NDER (net revenue growth rate) of benchmark users was 115%. In 2023, the company's big model business has been widely implemented in the fields of finance, manufacturing, medical care, retail, real estate brokerage, education, energy, etc., improving generative AI related services for hundreds of enterprises and partners. The Big Model has passed the national “Interim Measures on the Management of Generative Artificial Intelligence Services” and was selected as one of the first seven big model partners in Beijing. 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 promote the commercialization of AI.

Maintain target price of HK$80.53 and “Overweight” 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 revenue of 50.0/60.0/7.18 billion yuan (+19%/20%/20% yoy) in 24-26, and we expect net profit to mother of -3.7/-0.9/150 million yuan (+59%/77%/274% yoy) in 2024-26. The average 2024E PS of comparable companies is 5.5x. Considering the broad industry coverage of the fourth paradigm, the customer base is mainly large enterprises, which give the company 6.8x 2024E PS, maintain a target price of HK$80.53, and maintain “additional holdings”.

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