Incident: Fengyuzhu released its 2023 annual report and 2014 quarterly report. In 2023, the company achieved operating income of 2.35 billion yuan, a year-on-year increase of 39.75%, and net profit to mother of 282 million yuan, an increase of 327.53%; in the first quarter of 2024, the company achieved operating income of 295 million yuan, a year-on-year decrease of 30.29%, and net profit to mother of -15 million yuan.

Completed projects continued to improve, and operational capacity was strengthened. In 2023, the company actively promoted the release of backlog demand in the early stages and the execution of new projects, and completed projects and revenue and profit increased significantly year-on-year. The total amount of new orders signed throughout the year was about 2,649 billion yuan, an increase of 1,063 billion yuan over the previous year; as of December 31, 23, the company had an active order balance of 4.489 billion yuan, and reserves were abundant. In the first quarter of 2024, the company won bids for the 109 million yuan Suzhou “Heart of High Speed Rail” project and the 142 million yuan Jincheng City Exhibition Hall project respectively. The new order situation is good, providing support for the company's annual results. In terms of costs and expenses, in 2023, the company's gross margin increased by 2.76pct to 29.89%; sales/management/ R&D expenses were 5.34%/4.40%/3.37%, respectively, compared with -0.73%/-1.04%/-0.90%, and operating fundamentals continued to improve.

Seize opportunities for urban renewal and stimulate the potential for technological growth. The company actively grasped the historical timing of urban renewal and created a number of high-quality digital experience spaces. Renewal projects contributed 16.14% of revenue. In 2023, the company built the WorldSkills Museum with high quality, helped revitalize the century-old historical and cultural protection building “Yongan Storehouse”, and converted the old municipal government building, one of the first historic buildings in Hefei, into the Hefei City Memory Hall, etc. The company continues to cultivate the second growth curve of integrated development of VR/MR and AIGC, and announced the establishment of the MR Research Institute in January 24, which plans to develop applications of VR/MR and AIGC technology in the fields of culture, museums and tourism.

Profit forecast and investment advice: The company's project pace has been restored as scheduled, and new orders are expected to maintain good growth throughout the year, which is expected to support the company's subsequent performance. It is expected that 2024/25/26 revenue will be 25.71/28.12/3,039 million yuan, YoY +9.4%/+8.1%, net profit to mother 3.43/3.90/ 441 million yuan, YoY +21.4%/+13.9%/+12.9%, maintaining the “buy” rating.

Risk warning: changes in the macro environment; the size of winning orders falls short of expectations; risk of collection of accounts receivable.