Brief performance review

On March 26, 2024, the company released its 2023 annual report. The company achieved revenue of 3.41 billion yuan for the full year of 2023, down 10.6% year on year; gross margin was 44.1%, down 22.7 pct year on year; gross profit was 1.5 billion yuan, down 41.0% year on year; net profit was -6.49 billion yuan, loss increased 6.6%; adjusted EBITDA was -437 billion yuan, and loss increased 3.7%.

In the second half of 2023, the company's revenue was 1.97 billion yuan, down 17.6% year on year; gross margin was 43.2%, down 24.0pct year on year, gross profit was 850 million yuan, down 47.0% year on year; net profit was -3.35 billion yuan, loss increased 16.2%; adjusted EBITDA was 2.34 billion yuan, and loss increased 23.9%.

Management analysis

By business: 1) The generative AI business achieved revenue of 1.18 billion yuan in 2023, an increase of 199.9% over the previous year, mainly benefiting from the company's leading service capabilities for large devices and models. The company currently has a total computing power of 12,000 PetaFlops and operates 45,000 GPUs. 2) The smart car business achieved revenue of 380 million yuan in 2023, an increase of 31.1% year on year; in the second half of 2023, smart car revenue was 30 billion yuan, an increase of 74.3% year on year, mainly benefiting from the continuous delivery of fixed-point vehicles. The company added 1.29 million new vehicle product deliveries throughout the year, an increase of 163% over the previous year. 3) The traditional AI business achieved revenue of 1.84 billion yuan in 2023, a year-on-year decline of 41.1%. The share of the smart city business fell from 30% in 2022 to less than 10% in 2023.

In terms of expenses, the company's total sales/management/R&D expenses in 2023 was 5.08 billion yuan, a year-on-year decrease of 10.6%. It was mainly due to the company's business and organizational restructuring, and the number of employees fell 11.1% in 2023. In addition, impairment losses on the company's financial assets and contract assets in 2023 were $1.84 billion, up 10.0% year over year, mainly due to increased provision for impairment of accounts receivable. In 2023, the company identified the three major sectors of generative AI, traditional AI, and smart cars, focusing on generative AI, while maintaining the advantages of traditional AI business and smart cars, and optimizing operational efficiency. The margin of loss is expected to narrow.

Profit Forecasts, Valuations, and Ratings

Based on the company's 2023 annual report and positive growth expectations for the generative AI business, we expect the company's revenue from 2024 to 2026 to be 44.1/55.3/6.78 billion yuan, up 29.6%/25.4%/22.6% year on year; net profit to mother will be -47.8/-33.8/-20.1 billion yuan, respectively, and losses will shrink 25.8%/29.3%/40.5% year on year, corresponding to 5.9/4.7/3.9 times P/S, respectively, maintaining the “buy” rating.

Risk warning

The development of AI algorithms fell short of expectations; liquidity in the Hong Kong stock market was reduced; a stable and continuous profit model could not be explored; major shareholders reduced their holdings; and international relations were at risk.