Incidents:

On March 27, the company announced its 2023 annual report, with 2023 revenue of 3.08 billion yuan (YOY -40.65%), net profit attributable to mother of 660 million yuan (YOY +34.9%), after deducting net profit of 359 million yuan (YOY -38.8%). In 2023, it is proposed to distribute a cash dividend of $0.13 per share, totaling 165 million yuan, with a dividend ratio of 24.82%.

Investment highlights:

The contraction of social services and asset depreciation in 2023 put pressure on performance:

(1) 2023 revenue of 3.08 billion yuan (YOY -40.65%), mainly due to a decline in revenue due to the contraction of the wingman social networking business; net profit of 660 million yuan (YOY +34.9%), which achieved the equity incentive target of 650 million yuan; net profit deducted from non-return mother of 359 million yuan (YOY -38.8%). Non-recurrent profit and loss of 300 million yuan in 2023 (2022 - 97 million yuan), mainly from income of 210 million yuan from changes in the fair value of Haijian shares held, government subsidies of 30.5 million yuan, and profit and loss of 30.67 million yuan from changes in the fair value of financial assets.

(2) 2023Q4 revenue of 790 million yuan (YOY -36.9%), net profit attributable to mother - 29 million yuan (YOY -121.95%), net profit not attributable to mother - 245 million yuan (YOY -398.4%).

2023Q4 accrued asset impairment losses of 189 million yuan (2022Q4 was 77 million yuan), of which long-term investment depreciated 116 million yuan (mainly iReading Technology, 33.13 million yuan, Fun Entertainment, 46.21 million yuan). 2023Q4 Non-recurrent profit and loss of 217 million yuan, mainly due to the company's implementation of the new “Company Information Disclosure Explanatory Notice No. 1 - Non-Recurring Profit and Loss (2023 Revision)” in December 2023, which determined the impact of changes in the fair value of the company's investment in Haidian shares as non-recurring profit and loss (previously included in investment income).

(3) The gross profit margin in 2023 was 68.3%, up 6.88pct year on year; the cost ratio for the period was 42.9%, down 1.41pct year on year, mainly due to the company's contraction of social services with lower gross margin and higher purchase volume costs.

(4) In 2023, it is proposed to distribute a cash dividend of 0.13 yuan per share, totaling 165 million yuan, with a dividend ratio of 24.82%.

Whipped egg games are popular, and the wingman game business is progressing steadily:

(1) In 2023, the company's online game business had revenue of 1,317 billion yuan (YOY -23.6%), gross profit margin of 92.17% (up 0.09pct year on year); online social networking business of 769 million yuan (YOY -70.2%), gross profit margin of 57.18% (up 12.54 pct year on year). The 2023 Winger revenue/net profit split was $2.21 billion ($4.41 billion in 2022). By the end of January 2024, the winger whipped egg game app had surpassed one million DAU, ranking first in the country.

(2) The digital marketing business revenue in 2023 was 337 million yuan (YOY +24.0%), with a gross profit margin of 28.88% (year-on-year decrease of 18.1 pct), mainly due to the nine day merger of subsidiaries that were not under the same control in November 2023 and included in the consolidated report.

IDC is developing steadily to spread the brain/urban brain and launch an AI vertical model:

(1) In 2023, the technology information service business revenue was 641 million yuan (YOY +6.12%), and the gross profit margin was 53.13% (up 1.07pct year-on-year).

(2) IDC's business is developing steadily: Its subsidiary Fuchunyun has built about 10,000 sets of cabinets, and 2,500 sets are under construction. The existing contracted cabinets maintain a high charging rate and are steadily expanding the stock of cabinets. In 2023, Fuchunyun had revenue of 378 million yuan (YOY +4.7%) and net profit of 72.93 million yuan (YOY -16.1%).

(3) Gradual release of data transaction value: Its Zhejiang Big Data Trading Center took the lead in completing the industry's first data asset evaluation pilot and initially built a “1+N” integrated data circulation service platform across the province, with 4 industry-specific zones and 7 regional zones.

(4) Communication Brain & Urban Brain: By the end of 2023, Communication Brain had provided technical services to 88 media in Zhejiang cities and counties, launched the first large-scale vertical media AI model and went online. Urban Brain launched a large-scale model in the vertical field of social governance, expanding from within Zhejiang Province to markets outside the province such as Beijing and Shandong. Smart Network Hospital actively lays out markets outside the province and launched Chongqing's first district-level “Internet+ Smart Care” platform.

Profit forecasting and investment ratings: We are optimistic about the long-term value space of new digital technology businesses such as the company's data trading business, IDC business, and brain communication business, which is expected to open up a second curve of the company's performance growth. Based on the principle of prudence, we adjusted the company's profit forecast. The net profit for 2024-2026 is estimated to be 769/8.61/945 million yuan, the corresponding EPS is 0.61/0.68/0.75 yuan, and the corresponding PE is 18.33/16.37/14.92X, maintaining the “buy” rating.

Risk warning: risks such as game product performance falling short of expectations, increased risk of market competition, risk of technological innovation and loss of core talent, risk of technology development/application practices/data transactions falling short of expectations, capital market fluctuations, and risk of investment falling short of expectations.