Company Overview:

1) The company has been deeply involved in the digital creative industry for more than 20 years and is a leading digital solutions enterprise. It has formed three major business lines: 3D visualization products and services, digital display and system integration services (digital pavilions), digital twins and information software.

Among them, ① digital display and system integration services are the company's main business, accounting for 77% of revenue in 2023. The core focus is the company's future expansion of the C-side market and the construction of a digital ecosystem for the low-altitude economy. ② Digital twins and informatization software can be subdivided into digital twin platforms and virtual digital human businesses. They are the company's development focus and are in a period of rapid expansion.

2) The company's short-term performance is under pressure, but the operating background is good. In 2023, the company's net profit to mother fell to 0.011 billion yuan, putting short-term pressure on performance. However, the company's net operating cash flow is positive all year round and the interest-bearing debt ratio is at a very low level, indicating that ① the company has strong cash generation capacity and resilience to market fluctuations; ② the company's debt is low and there is more room for investment expansion; showing a good operating background and value base.

3) Equity incentives and repurchases demonstrate the company's confidence. ① The company implemented an equity incentive plan in 2023 to motivate employees, and used net profit of 54 million yuan and 65 million yuan as assessment targets for 2024 and 2025, demonstrating confidence in rebound performance.

② On May 7, 2024, the company announced a stock repurchase plan. It plans to use 15-30 million yuan of its own capital to repurchase about 1 million shares (0.955% of the company's total share capital), demonstrating confidence in the company's development prospects.

Digital pavilions:

Industry level: Downstream demand for digital pavilions is growing steadily. On the demand side, in 2023, there were 3,309 public libraries, 3508 cultural centers, and 6140 museums; in 2023, China's digital display market was about 14.8 billion yuan.

Company highlights: The company expands the C-side market and takes advantage of the low-altitude economy

1) The company laid out the C-side market and built the “Taishan Shenqi” project. The “Taishan Apocalypse” project is an important step for the company's C-side layout to help Tai'an Cultural Tourism write a good “Taishan +” article. The project combines technical means such as multi-dimensional spatial stereoscopic display and naked eye 3D to build an immersive digital experience space, which is expected to become a benchmark case for the company's C-side market.

2) Won the bid for the low-altitude economy exhibition project and entered the low-altitude economy digital ecosystem. The company won the bid for the “Baoan Low Altitude Economy Industry Public Service Center Construction Project Exhibition and Multimedia Procurement Project”, which is an important opportunity for the company to enter the digital ecosystem of the low altitude economy. The project is the first public service platform for the low-altitude economy industry in Bao'an District, attracting companies such as Yihang Intelligence, the “standard-bearer” of the low-altitude economy, to settle in. It was officially launched on May 6, 2024. We believe that by creating this benchmark case, the company can break into the exhibition business of more low-altitude economic operation centers, thereby further entering the digital ecosystem of the low-altitude economy.

Digital twins:

Industry level: Digital twins enable intelligent transformation in various industries, and the market space is vast. Digital twin technology can be applied to many fields such as intelligent manufacturing, smart cities, smart transportation, and smart medical care. China's digital twin market is 17.2 billion yuan in 2023, and is expected to reach 23.7 billion yuan in 2024, up 37.8% year-on-year, with a significant growth rate.

Company highlights: The company developed and iterated FT-E engines, and epitaxial mergers and acquisitions entered the vertical field 1) The company developed its own FT-E engine and insisted on iteratively upgrading the engine. The company developed its own lightweight digital twin rendering engine FT-E based on the localized B/S architecture. The engine combines GIS, BIM, and CIM technologies to process large-scale city-level data and achieve millisecond dynamic rendering. The company continues to iteratively upgrade the engine, strengthen integration with digital Earth, AR/VR, AI and GIS technologies, enhance data carrying capacity, and further enhance the capabilities of digital twin platforms.

2) The company creates a digital twin platform to help enterprises reduce costs and increase efficiency. Taking intelligent manufacturing and smart city applications as an example, the company built a digital twin application for a leading domestic manufacturer to help increase enterprise productivity by more than 40%; the company built a digital twin platform for a large city to increase the efficiency of comprehensive urban management by more than 50%.

3) The company took the first step in an extended merger and acquisition strategy by acquiring China Water, a specialized and new “little giant”. The acquisition will bring the company ① customer resources: China Water's customer resources and channels to accelerate the implementation of the company's digital twin+ water applications; ② technology collaboration: the company can integrate new technology to enhance the visualization and data governance capabilities of water information software.

Virtual digital people:

Industry level: The three factors of policy, technology, and market help the development of the virtual digital human industry. In recent years, the country has introduced digital talent cultivation, metaverse and supporting facilities to provide favorable conditions for the development of virtual digital people; at the same time, the rise of AIGC and Gen Z is promoting the development of the virtual digital human industry at both the technical and market levels. The core market size of virtual digital people in China is 205.2 yuan in 2023, and is expected to reach 480.6 yuan in 2025, with a CAGR of 53.0%.

Company highlights: The company focuses on technological empowerment to create large-scale cultural and expo IP1) The company deepens applications in the field of virtual human figures and helps upgrade virtual humans “digitally intelligent”. On the one hand, the company is deepening cooperation with Baidu's “Wenxin One Word” model to enable virtual humans to have AI-driven multi-modal interaction functions. On the other hand, we assist customers to build small AI models for the industry to enhance virtual digital intelligence capabilities in specific fields.

2) The company uses the cultural tourism industry as a breakthrough for mutual benefit and win-win situation with large cultural and expo pavilions. The company provides virtual image IP solutions for cultural and expo museums such as the National Museum, the National Version Hall, and the National Grand Theatre. On the one hand, the company can quickly establish a brand image through cooperation with well-known cultural museums; on the other hand, virtual people can quickly “go out of the circle” as the museum's exclusive cultural symbol, expanding the museum's influence.

First coverage, giving an “incremental” rating: According to the business split and profit forecasting model, we expect the company's revenue to be 0.789/0.915/1.023 billion yuan in 2024-2026, with net profit to mother of 0.055/0.066/0.076 billion yuan, respectively. The PE corresponding to the current stock price is 36.8x/30.4x/26.3x, respectively. Considering that the C-side business and the low-altitude economy have brought increased performance to the company's digital pavilion business, as well as the release of the performance of digital twins and information technology software, it was given an “increase in weight” rating.

Risk warning: risk of changes in the macroeconomic environment; risk of technology iteration falling short of expectations; risk of not updating information used in research reports in a timely manner, etc.