According to the company's 2023 results announcement, Shangtang's revenue for 2023 was 3.41 billion yuan, -10.57%; GAAP net loss to mother was 6.44 billion yuan, up 6.54% year on year; adjusted net loss was 5.41 billion yuan, up 14.31% year on year. We expect the company to continue to focus on the core business of generative AI, maintain advantages in computing power, algorithms, and large models, continue to promote business growth, effectively manage expenses, and promote core business profits. Maintain a buy rating.

Key points to support ratings

Generative AI revenue is growing rapidly, and the new 5.0 will be launched soon. In the business restructuring in 2023, the Shangtang business segment was restructured into three segments: generative AI, traditional AI, and smart cars. The generative AI business will become the company's key development direction in the future. The main business models of this business include public cloud models, private deployment models, and customized development models. In 2023, generative AI business revenue was 1.18 billion yuan, +199.9% YoY. Mainly due to the explosive growth in market demand for generative AI models for training, fine-tuning, and inference. In 2023, the total computing power of the Shangtang installation reached 12,000 PetaFlops, and the number of GPUs operated reached 45,000 cards. We expect the overall computing power of Shangtang to double in 2024. With the support of Shangtang's artificial intelligence “big device+big model” system, the new 5.0 version will be launched in April. It will fully target GPT-4 Turbo and support a million word lossless context. The multi-modal capability will also fully target GPT-4V, and related application scenarios will gradually be commercialized.

The strategy is shifting to generative AI to actively shrink the smart city business. After business restructuring, Shangtang merged smart cities, smart commerce, and non-generative AI businesses in smart living into traditional AI business segments.

In 2023, traditional AI business revenue was 1.84 billion yuan, +25.6% year-on-year. As the company's strategy shifts to generative AI, it actively shrinks its smart city business, which's share of revenue fell from 30% to at least 10%.

The core business continued to grow, and revenue related to advanced driver assistance systems rose sharply. In 2023, the smart car business revenue was 380 million yuan, +31.1% year over year. The two core areas of intelligent driving and smart cockpit have achieved continuous growth. Shangtang's ADAS-related revenue rose sharply, but revenue from providing R&D services to an OEM manufacturer declined, and it is expected that the focus of cooperation will shift to front-end products in the future.

Gross margin declined due to customer demand, and various rates were generally stable. In 2023, Shangtang's overall gross profit margin was 44.07%, mainly due to customer demand, the share of hardware and AIDC related costs increased; in 2023, the company's sales/administrative/R&D expenses ratio was 24.04%/44.36%/101.76%, respectively, +0.39/+3.20/ -3.64 ppts, which remained stable.

valuations

We expect the company to continue to focus on the core business of generative AI, maintain advantages in computing power, algorithms, and large models, promote business growth, effectively manage expenses, and promote core business profits. In 2023, the Shangtang business sector was restructured and will focus on generative AI. Considering that this part of the business is an emerging industry and requires a long period of development and exploration, we lowered Shangtang's 2024/25/26 revenue to 4487/56.36/7.333 billion yuan respectively, corresponding PS of 4.80/3.82/2.94 times, maintaining the “buy” rating.

The main risks faced by ratings

Macroeconomic growth has slowed; model performance has fallen short of expectations; policy supervision has become stricter; and user stickiness has declined.