Incident: The company released full-year results for 4Q23 and 2023. The company's revenue for the full year of 2023 was 7.05 billion yuan, a year-on-year decrease of 13.8%, mainly due to the company actively reducing the scale of the CDN business and screening industry cloud projects more strictly. 23. The company achieved a gross profit margin of 12.1% throughout the year, a significant increase of 6.8 pcts over the previous year. Among them, 4Q23 gross margin reached 14.7%, achieving continuous growth for 6 consecutive quarters, mainly benefiting from revenue structure optimization and effective cost control. A net loss of 2.18 billion yuan was achieved for the full year of 2023, which is significantly narrower than the loss of 2.69 billion yuan in 2022.

Continuing to deepen the strategic ecological cooperation between Xiaomi and Jinshan, AI revenue increased significantly in 4Q23. The 4Q23 public cloud achieved revenue of 1.05 billion yuan, a year-on-year decrease of 21.7%, mainly due to the company continuing to reduce the scale of the CDN business and optimize the customer structure. 4Q23's CDN business has dropped to about 23% of total revenue, and the revenue share of the largest CDN customer has dropped to 12%. In addition, the company continues to deepen ecological strategic cooperation with Xiaomi & Jinshan to actively grasp the cloud needs of Xiaomi Auto and WPS AI in training and inference. In 4Q23, revenue contributions from ecological partner companies reached 16%, an increase of 5 pcts over the previous year. On the AI side, the company set up an AI R&D center to continuously upgrade its core storage, database, network and other products, and continuously improve the MaaS mutual trust zone solution. 4Q23's AI revenue achieved a significant increase of 82% over the previous month, and currently accounts for 8% of public cloud business revenue. At the same time, the company signed a loan agreement of up to 1.5 billion yuan with Jinshan Software, which will be earmarked to support AI business development. Looking forward to the future, we believe that: 1) the revenue structure is expected to continue to improve: the company's CDN strategy adjustments or nearing completion; Internet customer big model training & inference, car companies' intelligent driving training and data migration are expected to drive AI computing power demand, and AI revenue is expected to become the core driving force for public cloud business growth; 2) gross margin is expected to increase further: on the one hand, improvements in revenue and customer structure will lead to increased profitability, and on the other hand, the company will continue to strengthen cost control. We judge that the cost reduction benefits brought about by the company's renegotiations with upstream suppliers are expected to continue to show.

The industry cloud focuses on advantageous vertical fields to create benchmarks to achieve a virtuous cycle. 4Q23 Industry Cloud achieved revenue of 670 million yuan, a year-on-year decrease of 14.7%, mainly due to the company's strict screening criteria and reduction in the scale of low-profit margin projects; however, revenue increased 10.2% month-on-month in a single quarter, mainly benefiting from the project delivery cycle and repeated promotion of high-quality projects. 4Q23 Camelot signed 4 new customers on the basis of maintaining stable cooperation with existing major customers; in addition, with benchmark projects built in the public service sector in Beijing, Wuhan, Zhuhai and other places, the company successfully joined hands with Shenzhen State-owned Assets Cloud to help local state-owned enterprises develop digitally. We expect the company to continue to focus on the three vertical fields of public services, healthcare, and financial services to achieve a virtuous cycle.

Profit forecasting, valuation and ratings: We believe that Jinshan Cloud, as a scarce neutral third-party cloud vendor in China, is expected to continue to benefit from the increase in computing power demand brought about by AI. Currently, the company has about 95,000 servers in China, and has increased Capex's investment in purchasing advanced AI servers. The AI business is expected to continue to contribute to revenue growth in the future. We expect the company's profitability to continue to improve as the public cloud revenue structure continues to be optimized, the quality of industry cloud projects improved, and cost reduction and efficiency improvements will continue, and it is expected that adjusted EBITDA will be corrected throughout the year 24. We raised the 24-25 net profit by 25%/30% to -13.6/-1.01 billion yuan, added the 26-year net profit forecast of -890 million yuan, and maintained the company's “increase in holdings” rating.

Risk warning: competition in the cloud industry intensifies, cloud expansion falls short of expectations, AI progress falls short of expectations, etc.