Incident: The company released its 2023 annual report. During the reporting period, the company achieved operating income of 52,616 billion yuan, +43.44% year over year; net profit to mother of 117 million yuan, +105.36% year over year; net profit after deduction of 150 million yuan, +107.91% year over year. Gross profit margin 3.44%, YoY 1.25pct, net profit margin 0.21%, YoY +6.15pct

Looking at a single quarter, in 23Q4, the company achieved revenue of 16.304 billion yuan, +61.26% year on year; net profit to mother - 171 million yuan, +92.23% year on year; gross profit margin 2.29%, -1.63 pct year on year, -0.66 pct month on month; net profit margin -1.06%, +20.74 pct year on year, -1.07pct month on month. The overall operating conditions of the business improved, and good cost control boosted net interest rates.

By business: Outbound advertising achieved revenue of 37.363 billion yuan (accounting for 71.01% of revenue), +41.69% year-on-year, gross margin of 1.66%, +0.15pct; full-case promotion services achieved revenue of 11.282 billion yuan, +73.05% year-on-year, gross margin of 8.37%, year-on-year -4.40pct; total advertising agency achieved revenue of 3,971 billion yuan, with gross margin of 6.19% year-on-year, year-on-year -6.77pct. The growth rate of launch and full-case promotion services is high, contributing additional volume to the company's performance.

In terms of profitability: 1) In terms of gross margin, the gross margin of the Chinese business declined in '23, causing the company's gross sales margin to -1.25pct to 3.44% year-on-year. 2) In terms of rates, the overall cost rate was -1.29pct to 2.84%, and the sales/management/R&D/finance expenses rates were 1.56%/1.00%/0.17%/0.11%, respectively, -0.70pct-0.48pct/-0.03pct-0.08pct year-on-year, respectively. The company's cost control was good. 3) In terms of net interest rate, net interest rate was 0.21%, +6.15pct year on year, improving profitability.

24Q1 revenue increased year-on-year, and profitability increased month-on-month. 24Q1 achieved revenue of 15.782 billion yuan/year over year, net profit of +61.47% year on year, gross profit ratio of -44.65% to 82 million yuan, gross profit margin of 2.94%, -2.04pct year on year, +0.65pct month over month, overall expense ratio 2.43%, year-on-month -1.08pct. In the context of increased gross margin and cost rate control, net margin was +1.57pct to 0.51% month-on-month, but there is still room for improvement.

Advertising revenue in the major industries covered by the company increased year-on-year, and e-commerce advertising and internet revenue performance was particularly impressive. During the reporting period, ① e-commerce industry customer revenue reached 13.180 billion yuan, +45.74% over the same period. This is mainly due to the company's combination of scale advantages, capabilities and AI, strong development of overseas business and increased marketing demand. With the breakthrough in closed-loop e-commerce, the advertising revenue growth rate of the agency TikTokForBusiness was nearly 50%; after the company started official agency cooperation with Microsoft Advertising and Pinterest, the performance showed multiple growth; the annual revenue of “Luban Cross Border Connect” exceeded the 1 billion yuan mark. With strong channel distribution capabilities and diversified platform cooperation such as brand live streaming operations, leading talent distribution, and private domain distribution, the company is expected to further enhance its influence in the industry and continue to boost the company's performance. ② The game industry's customer revenue reached 22.66 billion yuan, +30.19% year-on-year. ③ Customer revenue in the Internet and application industry reached 9.833 billion yuan, +108.53% year-on-year.

Continue to strengthen the metaverse business and accelerate the commercialization process. In 2022, the blue universe centered around people, goods, and markets in the metaverse, comprehensively laying out the three major business segments of virtual reality, WEB 3.0, and AIGC, and achieved a qualitative breakthrough in 2023: ① New industry: It has successively provided digital human R&D and operation, xR showroom solutions, and smart city sample construction for the digital construction of various cities such as Beijing, Shanghai, and Chengdu. ② New product: Self-research on third-generation LBE technology has been completed, and the first large space VR product is about to be launched, and a standardized solution has been formed; at the same time, based on the superior technology of XR studios, BlueBox, a C-side, unattended consumer-grade product has been created, which can provide an immersive consumer experience scenario. ③ New model: “Blue Label Smart Broadcasting” began testing the waters of the sales commission settlement model; the “virtual reality segment” officially entered the new field of ticketing sharing models, successfully signed more than 180 xRIP ticketing products for individual consumers in 2023, and successfully launched at the Shanghai World Metaverse Entertainment Festival. We believe that the company's three major business segments form a cross-supported business ecosystem. AI technology helps the company build integrated marketing capabilities and innovative business models for the future. AI applications combine self-developed large space VR products and new products such as BlueBox to open up new ideas for the expansion of the cultural tourism industry, and based on more than three years of experience in the metaverse business, it is expected to seize a larger market share in the future.

Accelerate the construction of the AInative model, and the project implementation is expected to increase profits. The company proposed a firm A1LinAI strategy in early 2023 and released the industry application model BlueAI in September 2023. The “human+AI” work model has achieved 100% full staff coverage, and the overall business productivity has increased by about 50%. In 2023, the company created nearly 300 real AI marketing cases, and AI-driven revenue reached 108 million yuan. In 2024, the company expects AI-driven revenue to grow by RMB 5-10 billion. The company continues to use generative AI to empower the main business, build enterprise-level marketing assistants based on industry models, enable market insight, consumer interaction, and multimedia content creation, and further enhance the level of AI organizational AI (it will try to establish a team driven by pure AI operations) and the level of AI business (it will build AI native marketing, native content, or a new model of generative marketing). We believe that the company has anchored AI in terms of strategy and tactics, and AI layout and business development have begun to bear fruit during the year. With AI technology and product selection upgrades in 2024, it is expected that more efficient applications will be implemented. The company is expected to use industry experience and channel advantages to take the lead in seizing the “AI+ Advertising/Marketing” market and create a performance growth curve.

Investment advice: As a leading digital marketing enterprise in China, the company's main business continues to grow in tandem with the AInative model on a large-scale basis. Blue Universe has also achieved “new industries, new products, and new models”, compounded by continuous optimization of the gross margin of overseas business. The company is expected to achieve high-quality development, thereby boosting performance and valuation. It is estimated that in 2024-2026, the company's net profit to mother will be 388/534/619 million yuan, respectively, and EPS will be 0.16/0.21/0.25 yuan respectively, corresponding to the current PE of 40/29/25 times, respectively, maintaining the “buy” rating.

Risk warning: risk of poor business development, risk of policy changes, increased competitive pressure, risk of losing top customers, risk of changes in TikTok's operations.