The 2023 results are in line with the forecast and our expectations. The 1Q24 profit slightly exceeded our expectations of the company's 2023 results: revenue of 1.43 billion yuan, up 27.5%; net profit to mother of 170 million yuan (net loss of 410 million yuan in 2022), falling into the forecast range of 140 to 180 million yuan; deducted non-net profit of 160 million yuan (loss of 420 million yuan in 2022), falling into the forecast range of 130 million yuan to 170 million yuan, in line with our expectations. At the same time, 1Q24 results were announced: revenue of 410 million yuan, up 13%/27%, respectively; net profit to mother was 53.44 million yuan, up 30%/337% YoY respectively, which was slightly better than our expectations, mainly due to cost control exceeding expectations. In addition, the company announced a proposed cash dividend of 0.08 yuan/share (tax included) in 2023, totaling 54.3 million yuan, accounting for 32% of net profit attributable to mother; in addition, the total repurchase of the company's shares in 2023 was 65.19 million yuan, for a total of 120 million yuan in the above two methods.
Development trends
Revenue continues to recover, and 2024 will focus on the upward trend in demand for games and e-sports. The company's revenue also increased by 28% in 2023; of these, 2H23 also increased 23%, mainly due to ChinaJoy's return to offline, driving exhibition business revenue of 120 million yuan (1% increase compared to 2021); online advertising, value-added business, and game business revenue of 2H23 all increased 6% year over year. 1Q24's revenue continues to grow. We believe that as demand for PC games and e-sports picks up, the company's revenue from online advertising and value-added services continues to recover, and it is expected that 2024 may continue to benefit from the rising boom in the game industry.
Gross margin is affected by fluctuations in revenue structure, and good cost control drives profit release. The gross margin is affected by seasonal fluctuations in the revenue structure. 2H23's gross margin increased 7ppt to 52% year over year, with gross margin of online advertising and value-added business increasing 7ppt to 35% year over year. The overall gross margin of the 1Q24 company decreased by 4ppt to 41%. We determine that the gross margin of online advertising and value-added services may decline, mainly due to the impact of revenue restructuring between advertising and value-added services. In terms of expenses, the company has good control. In 2023 and 1Q24, the company's sales/management/R&D expenses rates were 8%/15%/13% and 6%/12%/9%, respectively.
Clarify the new strategy of “based on computing power and focus on AI”, and focus on the company's computing power and AI business progress. On January 18, the company held a strategic upgrade and product upgrade conference to upgrade the original “Shunwang Cloud Business” to “Shunwang Computing Power”. Since then, the four core businesses have been computing power, AI, e-sports, and ChinaJoy. Specifically, in terms of computing power, the company launched computing power towers and computing power market products, as well as intelligent computing center business. On the AI side, Shunwang Smart's text generation algorithm was registered by the National Internet Information Office in February. The company said the engine is expected to promote the construction of high-quality AI companion applications. We believe that by iterating computing power and AI algorithm capabilities on the technical side and combining e-sports scenarios with ChinaJoy's offline entertainment needs on the application side, the company is expected to promote the commercialization of computing power and AI products and form a new growth engine.
Profit forecasting and valuation
Maintain the 2024/2025 earnings forecast and neutral rating. The current share price corresponds to 43/40 times 24/25 P/E. Due to the downward shift in the industry's valuation center, the target price was lowered by 16% to 11.1 yuan, corresponding to 45/42 times the 24/25 P/E, with a potential upside of 4.7%.
risks
Macroeconomic fluctuations, advertising demand falls short of expectations, Internet computing power business progress falls short of expectations, AIGC and metaverse applications fall short of expectations, industry policy risks.