Incident: The company released 1Q24 results, achieving revenue of 1.78 billion yuan, a year-on-year decline of 4.8%. It was mainly due to the company actively reducing the scale of the CDN business and screening industry cloud projects more strictly, but this was partly offset by the increase in AI revenue. The gross margin of 1Q24 reached 16.5%, up 6.1 pcts/1.8 pcts year over month, achieving continuous steady growth for seven consecutive quarters and reaching a record high. It mainly benefited from the optimization of the public cloud business revenue structure, improved quality of industry cloud projects, and effective cost control. The net loss for 1Q24 was $360 million. Adjusted EBITDA was corrected for the first time, corresponding to an adjusted EBITDA profit margin of 1.9%.

Continuing to empower the Xiaomi & Jinshan ecosystem, AI revenue continued to grow strongly in 1Q24. The 1Q24 public cloud achieved revenue of 1.19 billion yuan, an increase of 2.9%/12.9% year-on-year, mainly benefiting from the increase in AI revenue. 1Q24 has made positive progress in the three areas of AI business, ecosystem empowerment, and CDN strategy adjustment:

1) On the AI side, at the performance conference, the company stated that AI revenue in 1Q24 reached 160 million yuan, an increase of 93% over the previous month, accounting for 13.5% of the public cloud business revenue. The expansion of the AI business also led to further diversification of the company's customer and industry distribution. 2) In terms of ecological empowerment, the company actively grasped the cloud needs of Xiaomi Auto and WPS AI on the training and inference side. In 1Q24, the revenue contribution from Xiaomi & Jinshan Ecological Partners reached 19%, an increase of 4 pcts over the previous year. 3) In terms of CDN adjustments, the company continues to advance the strategic adjustment of the CDN business. The 1Q24 CDN business accounts for 23% of revenue, which is the same as 4Q23. However, the company continues to improve the profitability of CDN by promoting sales of high-value-added products, controlling internal procurement costs, expanding supplier coverage, and optimizing market prices and service delivery.

The Spring Festival effect put pressure on the cloud revenue of the 1Q24 industry, and continued to cultivate advantageous segments. 1Q24 Industry Cloud achieved revenue of 590 million yuan, down 17.2%/12.3% year-on-year, mainly due to the company's strict screening criteria and reduction in the scale of low-profit margin projects, compounded by the Q1 Spring Festival holiday affecting project delivery. 1Q24Camelot signed 4 new customers on the basis of maintaining stable cooperation with existing major customers; in addition, the company continues to focus on the three vertical fields of public services, healthcare, and financial services, focusing more on high-value-added products and services, and continues to refine core technology around customer needs.

Looking ahead to 2024 throughout the year: 1) AI will become an important engine driving the growth of public cloud business: on the one hand, the company actively grasps AI development opportunities, and the 1Q24 capital expenditure exceeds 1.2 billion yuan, paving the way for large-scale cluster deployment capabilities required for future AI training; on the other hand, the company established a wholly-owned subsidiary “Beijing Jinshan Intelligent Technology Co., Ltd.” to seize the digital transformation of enterprise intelligence and AI professional service opportunities; 2) The trend of increasing profits is expected to continue: the improvement of the revenue structure and the control of upstream costs are expected to bring profit With continued growth, we expect the company's gross margin to rise steadily to 17% throughout the year 24, and the adjusted EBITDA ratio is expected to reach 4%.

Profit forecast, valuation and rating: 1Q24 Jinshan Cloud achieved the first adjusted EBITDA correction since its establishment. We believe that Jinshan Cloud, as the only strategic cloud platform within the Xiaomi & Jinshan ecosystem, is expected to continue to benefit from the high-performance computing power demand brought about by SU7 delivery and WPS AI commercialization. Considering that profitability is expected to continue to improve, we raised 24-26 net profit of 3.1%/0.5% to -13.2/-10.0/ -8.8 billion yuan to maintain the company's “gain” rating.

Risk warning: competition in the cloud industry intensifies, cloud expansion falls short of expectations, AI progress falls short of expectations, etc.