Incident: The company released its 2023 annual report, achieving revenue of 2,929 million yuan (yoy +7.34%) and net profit of 298 million yuan to mother, turning a loss into a profit.

Net profit to the mother is close to the forecast limit, and the performance in 2023 is impressive. The company achieved revenue of 2,929 billion yuan (yoy +7.34%), with net profit of 298 million yuan, close to the upper limit of the performance forecast range. The main reasons for outstanding performance were: 1) the digital marketing business sector driven revenue side growth, which achieved revenue of 1,887 billion yuan (yoy +20.34%) in 2023; 2) strengthened cost control, and the overall cost ratio declined. The management expense ratio, sales expense ratio, and R&D expense ratio were 4.08% (-1.21pct) and 5.77% (-) 1.04pct), 4.19% (+0.02pct); 3) Investment income of 180 million yuan was generated from the disposal of the subsidiary Falcon Network, etc.

Digital marketing: The strategy focuses on Huawei's Whale Hong Kinetic Energy advertising system to fully benefit from structural growth dividends. In 2023, the company was an exclusive advertising agency in the four major industries of gaming, social networking, tools, and travel in the Huawei Whale Hong Kinetic Energy advertising ecosystem. In the context of the rapid growth of the advertising ecosystem driven by the volume of Huawei terminals, the company's digital marketing business achieved rapid growth. Looking ahead to 2024, Huawei will continue to release new products such as the P70, Nova series, and QQ M5. It is expected that the scale of Huawei terminals will continue to grow rapidly. At the same time, the Jinghong Kinetic Energy advertising system will also further cover more terminal equipment resources through Hongmeng ecological construction, which is expected to further attract advertising budgets, and the company can be expected to grow as its core advertising agency.

Internet media: Diversified operating strategies have worked, and the gross profit margin of the business has increased. During the reporting period, the company had media matrices such as tool advertising monetization apps and more than 50 customer paid subscription apps, PC browsers and plug-ins. The company continuously improved user stickiness by integrating ChatGPT into existing media, combining new products with new technologies such as AI, and actively carried out multiple customer acquisition strategies, and achieved good results. In 2023, its subsidiary EET launched various apps such as scanning and flight, all of which achieved an increase in the number of active users.

Thanks to refined operations, the gross margin of the Internet media business in 2023 was 44.74%, an increase of 3.43pct.

Investment advice: We believe that under the steady state of the company's Internet media business, digital marketing will fully benefit from the structural dividends of Huawei Whalhong Momentum and achieve rapid growth in performance (compared with net profit to mother after excluding the impact of investment income in 2023). It is estimated that in 2024-2026, the net profit to the mother will be 3.00/3.64/418 million, and the corresponding EPS is 0.24/0.29/0.33 yuan. The company is a scarce listing target in Huawei's marketing industry chain. It has a certain valuation premium, and is given 40 times PE in 2023, corresponding to a 6-month target price of 9.6 yuan, giving it a “buy-A” rating.

Risk warning: The macroeconomic recovery process fell short of expectations, the competitive pattern on the media side deteriorated, and competition in the media agency industry intensified.