Net profit increased 42% year over year, BaaS financial cloud grew rapidly

In 2023, Bairongyun recorded total revenue of RMB 2.68 billion (YoY: 31%) and net profit to mother of RMB 340 million (YoY: 42%). Net profit to mother was lower than our previous forecast of RMB 390 million, mainly due to the company's calculation of goodwill impairment related to Zhonglian in the second half of the year. The company's MaaS business achieved steady growth throughout the year, and the increase in the number of core customers was the main driving force. Cloud revenue in the BaaS financial industry increased 59% year over year, demonstrating the company's ability to commercialize generative AI. The BaaS insurance industry's cloud revenue growth rate is slowing down, or it may be affected by the “integration of reporting and banking.” With deep data insight, commercializable AI applications, and a solid customer base, the company is expected to seize the new opportunities brought by AI. Despite this, the company may face the challenge of insufficient credit demand in the short term, and we lowered our 2024/2025/2026 net profit forecast to 4.3/56/ 8.1 billion yuan (previous value: 4.7/6.1 billion yuan). As of March 25, the average 2024E PE of comparable companies was 29.2x. Based on the low liquidity in the Hong Kong market, we gave the company 20x 2024 forecast PE, with a target price of HK$18.5, maintaining a “buy” rating.

The number of core customers increased, and the core customer retention rate reached 99%

The company's MaaS business is based on decision-making AI technology. The revenue for the full year of 2023 rose to 890 million yuan (YoY: 17%), the average revenue of core customers was 3.5 million yuan (YoY: 3%), and the number of core customers rose to 213 (2023:187). The core customer retention rate rose to 99% (2023:98%), showing the company's strong customer base and brand reputation within the industry. It is worth noting that the average revenue growth rate of the company's core customers throughout the year was slower than 11% in the first half of the year, which may indicate a more prudent lending strategy for financial institution customers. Core customers are defined as customers that have contributed 300,000 payments in the past 12 months. Based on the company's high customer coverage rate, we believe that the increase in the number of core customers reflects the customer's willingness to pay and the expansion of the company's product map, and validates the business logic of “land first, expand later”.

We believe that, based on deep data insights and a solid customer base, the MaaS business is expected to maintain a first-mover advantage and achieve steady growth in the number of core customers and average revenue.

The scale of BaaS financial cloud asset transactions is growing rapidly

The company's BaaS business is based on generative AI, and BaaS Financial Cloud/BaaS Insurance Cloud recorded revenue of 1,18/60 billion yuan in 2023, an increase of 59/ 10% over the previous year. The BaaS financial industry cloud technology service rate was 2.23% (2022:2.71%), and the loan matching scale was $53.1 billion (YoY: 93.3%). The BaaS insurance industry's total cloud premium scale was 3.33 billion yuan (YoY: 56%), and renewal premiums accounted for about 41% (2022:47%). The overall policy service rate dropped to 18.2% (2022:25.7%), or was affected by the short-term integrated reporting and banking policy. The year-on-year growth rate of 2H23 BaaS financial cloud asset transaction volume lower than 1H23 may reflect weak credit demand in the second half of the year. We believe that, with the power of generative AI, the company is expected to seize the growing operating needs of financial institution users in the future and gradually expand the scale of asset transactions in credit, insurance, and wealth management on the premise of controlling costs.

Risk warning: Regulatory risk, data security, increased industry competition, and risk of failure to control revenue and expenses of expanding core customers.