1Q24 revenue was in line with our expectations, and net profit was lower than our expectations

The company announced 1Q24 results: revenue of 363 million yuan, up 9.7% year on year; net profit to mother of 32.78 million yuan, up 2.4% year on year; net profit after deducting non-return to mother of 27.03 million yuan, up 13.14% year on year.

1Q24 revenue was in line with our expectations, and net profit was lower than our expectations, due to the G-side business loss reduction being lower than our previous expectations.

Development trends

1Q revenue grew steadily, and changes in revenue structure led to an increase in gross margin. In 1Q24, the company's gross margin increased by 0.7ppt to 63.8% year-on-year. We expect the company's high-margin B-side business revenue to grow by more than 10%, and the G-side business will develop steadily. Looking ahead to 2024, we believe: 1) In terms of B-side business, the company is expected to further enhance its market influence in the customer base of small and medium-sized enterprises and accounting companies, enhance customer value through excellent tax-compliant business, and create momentum for the company's revenue growth and profit margin increase. 2) In terms of G-side business, we believe that the company will increase cost control through digital methods such as AI. G-side revenue performance is expected to be stable in 24, and G-side business losses are expected to be about 30% narrower than in 2023.

Develop fiscal AI and continue to invest in technology research and development. In 1Q24, sales expenses increased 6.4% year on year to 55.64 million yuan. We believe that the increase in sales expenses was mainly due to the promotion needs of the company's sales activities; management expenses increased 3.2% year over year to 47.4 million yuan, which is well controlled; and R&D expenses increased 10.0% year over year to 105 million yuan. We think it is mainly due to the company's continued investment in R&D of fiscal and taxation AI products. 1Q24 net profit to mother increased 2.4% year on year, net profit margin was 9.0%, down 0.6ppt year on year.

With the fourth phase of the gold tax and the nationwide promotion of “digital electronic bills”, the growing demand for corporate fiscal compliance is expected to bring market opportunities. With the implementation of the fourth phase of the gold tax, and along with the nationwide promotion of electronic accounting document data standards represented by “digital electronic bills,” we believe that the demand for digital management of “business, finance, tax, and invoices” is expected to grow. The company's “100 Million Enterprise Win” brand takes the lead in the SME finance and taxation service platform market. It operates in a hierarchical manner around the three major customer groups: fiscal and taxation agents, small and medium-sized enterprises, and enterprise groups. We believe that the company develops high-value compliance products to meet the digital management needs of enterprises, and that the B-side business has potential for development.

Profit forecasting and valuation

Considering the slowdown in the company's G-side revenue growth rate, we lowered the company's 24/25 revenue 3.0%/3.7% to 20.80/2.361 billion yuan; considering that G-side business losses fell short of expectations in 24, we lowered net profit 23.3% to 200 million yuan in 2024; the gross margin of the G-side business is expected to improve in 25, keeping the profit forecast for 2025 unchanged. The current stock price corresponds to the 2024/2025 price-earnings ratio of 47.4/24.4 times. We refer to the 2025E price-earnings ratio valuation, consider the company's market-leading position in the corporate finance and tax service platform, and maintain the industry rating and target price of 34.00 yuan, which corresponds to 35.7 times the 2025 price-earnings ratio. There is 46.5% upside compared to the current stock price.

risks

G-side business losses expanded; B-side market development fell short of expectations; tax informatization budgets fell short of expectations.