The 1Q24 Prophet platform continued to increase, with a target price of HK$80.25. The fourth model released 1Q24 performance, with revenue of $830 million, up 28.5% year on year, and gross profit of 340 million yuan, up 21.1% year on year. The company's 1Q24 performance growth was mainly due to strong revenue growth (84.8%) from the Prophet AI platform. This performance segment grew 68.0% for the full year of 2023, and 1Q24 continued the rapid growth since 2023. We continue to be optimistic about the company: 1) using major customers as a fulcrum to develop new industries and increase penetration in the industries already covered; 2) restructure enterprise software with generative AI and improve customer experience and development efficiency with a solid foundation of enterprise service software. We maintain our 2024/2025/2026 revenue forecast of $50.0/60.0/7.18 billion. The average 2024E PS of comparable companies was 6.2x. Considering the broad industry coverage of the fourth paradigm, the customer group was mainly large enterprises, which gave the company 6.8x 2024E PS and a target price of HK$80.25 (previous value: HK$80.53, HKD to RMB 0.91019). Considering the steady progress of the industry's big model, it was raised to a “buy” rating.

The revenue growth rate of the Seer AI platform is impressive

The company's 1Q24 revenue was 830 million yuan, up 28.5% year on year, of which: 1) the revenue of the Prophet AI platform was 50 million yuan, up 84.8% year on year; 2) SHIFT intelligent solution business revenue was 250 million yuan, down 14.6% year on year; 3) AIGS service business revenue was 80 million yuan, down 5.1% year on year.

The company continues to optimize AIGS Code X products as an auxiliary programming tool, and has thoroughly explored programming development with leading companies in many industries such as finance, operators, and new energy vehicle companies. The decline in revenue from SHIFT Solutions and AIGS was mainly due to seasonal volatility. The company's 1Q24 gross margin was 41.2%, down 5.9pp from 2023, mainly due to seasonal fluctuations in the industry and phased business structure.

The benchmark user ARPU grew rapidly, and the industry's biggest model was launched in 1Q24. The total number of company users was 124, of which 54 were benchmark users, and the benchmark user ARPU was 8.8 million yuan, an increase of 64.0% over the previous year. The company's benchmark user revenue accounted for 58%, a slight decrease from 61% in 2023. The company continues to implement major industry models, continues to cultivate key industries such as finance, energy and electricity, transportation, and operators, while increasing penetration in the fields of manufacturing, medical care, retail, etc., and has formed an exemplary industry model in the core business scenarios of intelligent manufacturing and medical industries. At the end of March 2024, the company released the Prophet AI platform 5.0. Users can build large industry models based on different modal data from various industry scenarios.

The target price was given at HK$80.25, and the rating was raised to “Buy”

Based on the company's forward-looking platform, solutions, and continuous growth of AIGS business, we expect the company to achieve operating income of 50.0/60.0/7.18 billion yuan (+19%/20%/20% yoy) in 24-26, and a net profit of 3.7/-0.9/150 million yuan (+59%/77%/274% yoy) in 24-26. The average 2024E PS of comparable companies is 6.2x. Considering the broad industry coverage of the fourth paradigm, the customer base is mainly large enterprises, giving the company 6.8 x 24E PS. The narrowing of the valuation premium was mainly due to the company's 1Q24 revenue growth rate and decline in gross margin. The target price of HK$80.25 was raised to “buy”.

Risk warning: macroeconomic fluctuations; technology implementation falls short of expectations; market competition intensifies.