Key points of investment:
Establish an “All in AGI and AIGC” strategy to empower the business line with AI. Model side: The company released the “Tiangong 1.0” model in April 2023, “Tiangong 2.0” in February 2024, and “Tiangong 3.0” in April. “Tiangong 3.0” uses a MoE architecture with 400 billion parameters. It is currently one of the open source MoE models with the largest model parameters and the strongest performance in the world. Application side: The company launched official agents such as AI writing, AI painting, AI data analysis, and AI partner based on AI search, and actively deployed AI music, AI video, AI games, and AI social networking based on AI technology.
AGI and AIGC business: Self-developed large models have leading reasoning capabilities, and AI search may challenge traditional search models. The number of people active in Tiangong AI has exceeded 1 million per day, second only to Wenxin Yanyan and Doubao in China. Based on the evaluation results of various mainstream evaluation lists such as CEVAL, the Tiangong series model's reasoning ability is at the forefront of the industry, close to the 70B Dense model, reducing inference costs by nearly 3 times. The company's Tiangong AI search is the first AI search product in China. Compared with the traditional PageRank search model, Tiangong AI search has the characteristics of comprehensive and accurate responses in Chinese, accurate capture of users' true intentions, high timeliness, and good answer quality. The AI search business model mainly relies on advertising information flow and smart VIP services, etc., and AI search ROI is worth looking forward to; in terms of AI music and AI games, the company empowers UGC development with AI, enhancing user experience while improving user stickiness.
Opera is positioned as an overseas information distribution platform, and the ARPU value is increasing year by year. The business covers the fields of online advertising, search, information distribution, and the metaverse, with over 390 million monthly active users worldwide. Beginning in 2023, Opera explores integrating AI into the browser platform, launched the new browser Opera One that year, and launched “Aria”, a native AI assistant built into the browser. In the context of increasing user service capabilities, Opera's ARPU value increased year by year from $0.50 in 2020 to $1.44 in 2023.
StarMaker and the game business have maintained steady growth. StarMaker has successfully boosted user growth and retention through live streaming music and social networking operations, and is still highly popular worldwide. At the end of 2023, it ranked in the top five music/audio app download lists in 126 countries and regions, with 82 countries and regions ranking first. The game business relies on the gradual release of game reserves and is expected to remain steady.
Investment advice: We expect the company's net profit to be 889 million yuan, 963 million yuan, and 1,010 billion yuan respectively in 2024-26, or -30.2%, +9.7%, and +4.8% compared to the same period last year. Short-term AI strategic investment may put pressure on net profit. We used the segmental valuation method to estimate the company's reasonable market value range in 2024 to $44.259 billion to $49.347 billion. Considering that the company is a first-tier enterprise in the domestic AI industry, the company may use AI to form a strong competitive advantage. First coverage, giving a “buy-A” rating.
Risk warning: AI development falls short of expectations, policy risks, loss of users, fluctuations in investment business, etc.