Investment highlights

The fourth paradigm (06682.HK) was applied for the first time to give the industry a rating of outperforming. The target price was HK$55.00, based on 3.8 times the 2025e P/S valuation. The company is a leading supplier of enterprise-side AI platforms and solutions in China. We believe that it has achieved continuous high revenue growth based on the AIOS platform+solution+service business model supported by leading AI technology and first-mover cases represented by finance. The reasons are as follows:

The fourth paradigm uses the AIOS platform+solution+service model to enable the digital transformation of enterprises. Using the AIOS platform as the technical foundation, the company formulates the company's internal “data format” standards and provides development kits to achieve efficient “drag and pull” modeling. The 1Q23 data shows that the gross margin of the AIOS platform exceeds 90%; it has upgraded SHIFT industry solutions and AIGS services to lower the usage threshold for business and IT personnel, and efficiently tap the value of enterprise data. It has empowered financial, manufacturing, communications, energy, rail transit and other industries to achieve digital transformation in risk prevention and control, accurate marketing, and intelligent operation.

The digital transformation of enterprises has broad space, and the company positioning industry model has the advantage of card slots. We believe lower-cost platforms and solutions can catalyze AI transformation for enterprises. According to the CIC report, China's AI spending is 225.5 billion yuan in 2022, and the CAGR is expected to reach 25% in 2027. China's decision-making AI market is expected to grow to 210.4 billion yuan in 2027. Among them, the platform-centered decision-making AI market is expected to reach 74.9 billion yuan in 2027, which is considerable space. Furthermore, in the big model era, demand for enterprise knowledge bases drives further expansion of space, and manufacturers with data and industry knowledge enjoy higher pricing rights. In 2022, the fourth paradigm ranked first in the domestic market share of 22.6% of the platform-based decision-making AI market.

The business model is based on US Palantir, and the financial industry's first-mover advantage drives cross-industry demonstration effects. The business model dimension, the fourth paradigm is based on Palantir, hoping to standardize project requirements with platform-based products.

Palantir uses Gotham and Foundry platforms with high product capabilities to build the basic architecture of big data software, and also introduced Apollo and AIP platforms to enhance ease of use in multiple environments and the unified reliability of data formats brought about by large language models, and achieve rapid penetration among enterprise customers. The fourth paradigm quickly creates financial benchmark cases through plans for ICBC and CMB. According to the company's prospectus, it has received investment from 5 major state-owned banks, and has driven cases in various industries such as energy and electricity, transportation, telecommunications, and manufacturing, bringing about first-mover barriers.

What is our biggest difference from the market? The market generally believes that domestic 2B software is dominated by the project system. We believe that the company's business model of supporting solutions and services with platforms is expected to bring about business expansion and expansion.

Potential catalyst: AI empowers enterprises to increase the penetration rate of digital transformation.

Profit forecasting and valuation

We forecast that the company's total revenue in 2024/2025 will increase 22.5%/18.9% year over year to 5.15/6.12 billion yuan; adjusted net profit will be -0.32/0.007 billion yuan. The first coverage gave the company an outperforming industry rating and a target price of HK$55, corresponding 3.8 times 2025E P/S. Currently, the transaction is 3.0 times 2025 EP/S, with 24.4% upside.

risks

Technology iteration falls short of expectations; promotion of platform-based products falls short of expectations; R&D investment puts pressure on profits.