1H24 results fall short of our expectations
The company announced 1H24 results: revenue of 0.705 billion yuan, down 1.8% year on year; net profit to mother 0.024 billion yuan, down 44.0% year on year; net profit without return to mother 0.015 billion yuan, down 54.6% year on year. Among them, 2Q24 revenue was 0.347 billion yuan, a year-on-year decrease of 4.4%; net loss to mother was 1.16 million yuan, after deducting non-return net loss of 7.12 million yuan, all of which changed from profit to loss year over year. 1H24's large model development continues to advance, but implementation is slower than expected. Combined with intense competition from external traffic, the overall performance is lower than our expectations.
Development trends
Competition for traffic has intensified, and performance is under pressure in the short term. By business, 1H24's video creative/utility tools/graphic creative/document creative revenue was +1.0%/-10.6%/-7.5% to 4.61/0.12/0.063/0.059 billion yuan, respectively. Revenue from core video creative applications achieved positive growth but slower than market expectations. 1H24 sales expenses were 0.365 billion yuan (+1.2% YoY), of which advertising expenses were 0.279 billion yuan (+1.1% YoY). We think this part reflects the intense competition for external traffic and the increasing difficulty of obtaining high-quality traffic. At the same time, since some of the company's audio and video algorithms are still in the batch inspection and evaluation stage, implementation progress is slower than market expectations, putting pressure on the company's performance in the short term.
Major audio and video models continue to be developed, and commercialization is still in the early stages. At the end of January 2024, the company officially released the “Tianmu” model 1, which covers capabilities such as Wensheng video, video music, video soundtrack, Wensheng sound effects, Wensheng map, and Tuteng chart. Currently, it has integrated related capabilities into applications such as Wondershare Filmora (AiCopilot intelligent editing assistant, AI text cut, AIGC music, etc.) and Wanxing Broadcasting (digital human, AI video translation). In terms of commercialization, the company plans to implement commercial charges for different AI functions in the form of AI add-on packages, AI feature payments, and subscription memberships. We believe that the company's current commercialization of AI functions is still in the early stages. As the underlying model iteration brings improvements in multi-modal functions, we believe that the incremental revenue brought to the company by AI functions is expected to gradually be released.
Profit forecasting and valuation
Considering that the implementation of the company's AI audio and video algorithm was slower than expected and competition for high-quality traffic increased, we lowered the company's 2024 revenue by 24.1% to 1.572 billion yuan; considering that R&D investment and traffic investment will continue, the 2024 profit was reduced by 41.0% to 0.089 billion yuan; and introduced for the first time 2025 revenue/profit of 1.808/0.165 billion yuan. Considering the impact of the decline in the industry valuation center and the increase in share capital brought about by transfers, the target price after the reduction was 48% to 57 yuan (target price corresponding to 7.0/6.1x 2024/2025 EP/s). There is 26.2% upside compared to the current price, and the current price corresponds to 5.6/4.8x 2024/2025e P/S. Considering that the company has a first-mover landing scenario in the domestic audio and video model field, it is expected that it will continue to benefit from the continuous optimization of the multi-modal model to achieve application implementation and maintain the industry rating.
risks
AIGC products fall short of expectations; increased overseas competition; AIGC compliance risk; risk of market fluctuation; risk of impairment of goodwill; risk of increased sales investment.