Core views

In 2023, Shangtang achieved revenue of 3.406 billion yuan, a year-on-year decrease of 11%, and realized gross profit of 1,501 billion yuan, corresponding to a gross profit margin of 44.06%, a year-on-year decline, achieving a net loss of 6.44 billion yuan to mother, an increase over the previous year. The company redivided the business segment and clarified three business directions: generative AI, traditional AI, and smart cars. Among them, generative AI revenue reached 1,184 billion yuan, up 200% year on year, accounting for 35% of the group's total revenue. The scale of traditional AI business was drastically reduced, revenue fell to 1,838 billion yuan, down 41% year on year, and smart car business revenue reached 384 million yuan, up 31% year on year. The company has forwardly invested in and operated SenseCore, the largest AI-specific infrastructure in China, to help it gain a first-mover advantage in computing power in AI 2.0 transformation and upgrading, and has achieved remarkable results in developing large base models and generative AI applications. The revenue and share of the generative AI business is expected to continue to increase, and the scale effect will help the company gradually narrow its losses.

occurrences

In 2023, Shangtang achieved revenue of 3.406 billion yuan, a year-on-year decrease of 11%, and realized gross profit of 1,501 billion yuan, corresponding to a gross profit margin of 44.06%, a year-on-year decline, achieving a net loss of 6.44 billion yuan to mother, an increase over the previous year.

Brief review

Generative AI and smart car businesses are growing rapidly. In 2023, Shangtang achieved total revenue of RMB 3.406 billion, a year-on-year decrease of 11%. The company redivided the business segment and clarified three business directions: generative AI, traditional AI, and smart cars. Among them, generative AI revenue reached 1,184 billion yuan, a year-on-year increase of 200%, accounting for 35% of the Group's total revenue, mainly due to the explosive growth in market demand for generative AI models for training, fine-tuning, and inference. The company has forwardly invested in and operated SenseCore, the largest AI-specific infrastructure in China, to help it gain a first-mover advantage in computing power in AI 2.0 transformation and upgrading, and has achieved remarkable results in developing large base models and generative AI applications. Smart car business revenue reached 384 million yuan, up 31% year on year, accounting for 3.6 pct to 11% of the Group's total revenue. Product deliveries in the two core areas of smart cockpits and intelligent driving products have increased dramatically. In 2023, 1.29 million new units were delivered, an increase of more than 160% over the previous year, and the gross profit of smart cockpits increased by 30%.

The scale of the traditional AI business was drastically reduced, and revenue fell to 1,838 billion yuan, a year-on-year decrease of 41%. The share of total revenue fell 28 pcts to 54% from 82% in '22. In 2023, the company took the initiative to shrink its smart city business. The revenue share of this business was reduced by about 20 pct to less than 10%. By adjusting its business model, the company reduced its dependence on smart city projects.

Gross margin was under pressure, and the cost ratio improved during the period. In 2023, the company achieved gross profit of 1,501 billion yuan, corresponding to a gross profit margin of 44.06%, a year-on-year decline, mainly because the company increased investment in hardware and AIDC related services in 23 to meet customer needs. The computing power doubled compared to the beginning of 2023, surpassed 1200 python flops, and the number of GPUs launched reached 45,000. The total cost for the period was 5.8 billion yuan, down 10.6% year on year, including 23 billion yuan of 3.466 billion yuan, down 9.1% year on year, management expenses decreased by 3.6% year on year, sales expenses decreased by 3.6% year on year, sales expenses of 819 million yuan, decreased 13.7% year on year. Thanks to the optimization of the group's operating efficiency, the company's R&D cost rate/management cost rate/sales expense ratio were -101.76%/-44.36%/-24.04%, respectively, a decrease of 3.64pct/3.2pct/0.39pct. For the full year of 2023, the company achieved a net loss of 6.44 billion yuan and a non-IFRS net loss of 5.414 billion yuan. The corresponding net profit margin reached -159%, and the loss ratio expanded. Mainly due to increased impairment provisions due to lower than expected repayment of smart city-related revenue, the amount receivable reached 3.9 billion yuan in 23, an increase of 48.5% over the previous year.

Profit forecast and valuation: We expect Shangtang's revenue for 2024-2025 to be 4.496 billion yuan and 5.889 billion yuan, respectively, with year-on-year growth rates of 32% and 31%, including generative AI revenue of 2,248 billion yuan and 3,597 billion yuan respectively, traditional AI revenue of 1,753 billion yuan and 1,666 billion yuan respectively, and smart car business revenue of 495 million yuan and 627 million yuan respectively. Maintaining a “buy” rating, the target price was given at HK$0.97, corresponding to 5 times PS in 2025.

Risk warning: (1) Policy risk: China's policy environment may have a significant impact on Shangtang Technology. As the Chinese government tightens regulations on the AI industry, companies may face the risk of policy changes that could affect their business model and growth. (2) Competitive risk: The field of artificial intelligence is full of fierce competition. Shangtang Technology faces competition from other technology companies around the world, which could adversely affect its market share and profitability. (3) Technical risk: Shangtang Technology's technological development falls short of expectations. (4) Geopolitical risk: Geopolitical tension between China and other countries may have an impact on Shangtang Technology's business. This includes issues such as export controls and restrictions on international market access. (5) Financial risk: Shangtang Technology has cash flow and continued unprofitable risks. (6) Amortization risk of intangible assets, low expectations for repayment of accounts receivable.