Revenue from social business adjustments fell 40.7%, and changes in the value of financial assets affected net profit for the whole year. 1) The company's revenue in 2023 was 3.08 billion yuan, -40.7% year-on-year, mainly due to adjustments in social business, online gaming/online social/ technical information/ digital marketing revenue of -23.6%/-70.2%/-21.9%/+24.0%, respectively; net profit to mother of 660 million yuan returned to the growth trajectory, +34.9% year-on-year, mainly due to changes in the fair value of transactional financial assets held and the increase in investment income of associated enterprises; net profit without deduction of 360 million yuan, compared with the same period. Significant long-term asset impairment losses ($190 million). 2) The company's fourth quarter revenue was 790 million yuan, year-on-year net profit of -0.3 billion yuan, -122.0% year-on-year, and net profit after deduction of 530 million yuan, +307.1% year-on-year.

The share of the game business rebounded, and gross margin increased 6.9 percentage points year over year. The company's gross profit margin in 2023 was 68.3%, +6.9 percentage points year over year, mainly due to the reduction in the cost of online game operation and the continued recovery. The gross margin of online gaming/online social/technical information services/digital marketing by business was 92.2%/57.2%/53.1%/28.9%, respectively, +0.1/+12.5/+1.1/-18.1 percentage points year over year, respectively. The overall cost rate for 2023 was 42.9%, -1.4 percentage points year on year. The sales/management/finance/R&D expenses ratio was 13.8%/15.2%/-0.4%/14.4%, respectively, -13.2/+7.6/-0.4/+4.5 percentage points year over year, respectively, mainly due to reduced marketing fees and increased interest income from online social networking services.

Wingman Network's main business has rebounded steadily in profit margins, and the big communication model continues to be updated. 1) In the digital culture sector, the wingman online social networking business was reduced, and revenue -49.8%, and the net interest rate increased by 12.9 percentage points to 28.9%. In addition, the company is also cultivating its “Palm Thunder” literary platform to expand new tracks. 2) In the digital technology sector, Fuchunyun IDC's business is steady (revenue of 380 million yuan, +4.7% year over year, net interest rate decreased by 4.8 percentage points to 19.2%). The AI application “Communication Big Model” became the first major media model to be registered through the Big Model in February 2024. The Zhejiang Daily Digital Culture and Technology Park successfully passed the completion inspection and filing, and will build a digital technology industry incubation base in the future. 3) In terms of data operation business, 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.

Risk warning: AI application development falls short of expectations; product competition is fierce; regulatory risks.

Investment advice: Continue to be optimistic about the digital economy and the company's industrial chain layout advantages in the AIGC era, and maintain the “gain” rating. The company's game business is growing steadily, the construction of IDC and data trading centers is progressing smoothly, and AI applications continue to break through, but the company's business adjustments and R&D investment are large in the short term. We slightly lowered our profit forecast. The company's net profit for 2024-2026 is estimated to be 7.4/83/9.3 billion, respectively (86/999 million in 24-25); the spread EPS = 0.59/0.66/0.73 yuan. The company's AI application is implemented rapidly, and there is plenty of room for long-term growth to maintain the “gain” rating.