Fourth Paradigm 1H24 performance is in line with our expectations

The company announced 1H24 revenue of 1.867 billion yuan, up 27.1% year on year; net loss to mother narrowed by 0.304 billion yuan to -0.152 billion yuan year on year; net loss after deducting non-return to mother narrowed by 0.309 billion yuan to -0.169 billion yuan year on year.

The 1H24 results were in line with our expectations.

Development trends

The platform business is growing rapidly, and the trend of reducing losses continues. On the revenue side, 1H24's revenue was 1.867 billion yuan, of which the Prophet AI platform/SHIFT intelligent solution/AIGS service changed 65.4%/-22.1%/25.0% year-on-year to 1.251/0.453/0.163 billion yuan, respectively. According to the company's public results meeting, during the performance period, the company used “Fan Ecology” partners to further expand platform business cooperation, and the Prophet AI platform's revenue share further increased to 67.0%. On the profit side, 1H24's gross profit was 0.79 billion yuan, up 12.1% year on year. Affected by the increase in hardware-related revenue due to increased demand in the downstream computing power industry, the company's 1H24 gross margin fell 5.7ppt to 42.3% year on year; net loss to mother and net loss after deducted from mother narrowed by 0.304/0.309 billion yuan to -0.152/-0.169 billion yuan year on year, and overall operation was steady.

Committed investment in R&D and polishing products, the benchmark customer ARPU continues to grow. The company maintained high R&D investment and consolidated the product moat. 1H24 R&D expenses were 0.85 billion yuan, an increase of 28.4% over the previous year, and the R&D cost rate reached 45.5%. The core business “Fourth Paradigm Seer AI Platform” grew strongly, supporting large-scale use in 14 industries and producing more than 30 products. The total number of the company's customers reached 185 during the performance period, including 86 benchmark customers. Benchmark customers achieved an average revenue of 11.48 million yuan. The average revenue contribution of the benchmark user group increased 26.9% year-on-year, an increase over the average revenue of the 1Q24 benchmark customer base of 8.89 million yuan.

Core platform products continue to be iterated, and industry cooperation continues to expand. In terms of platform products, the company released Prophet AIOS 5.1 at the end of July, introducing GPU resource pooling functions, enabling platform-based management of hardware clusters and rapid scheduling of computing power resources, saving up to 80% of hardware costs and increasing the overall utilization rate of GPUs by 5 to 10 times. In terms of SHIFT products, the company launched the AIGS CodeX enterprise-level programming assistant during the performance period, which greatly improved enterprise coding efficiency. At the same time, it also released the “Tianshu” integrated platform “Tianshu” to help enterprises improve user retention and conversion rates. At the level of commercial cooperation, the company set up a joint laboratory with Wanbangtong, a subsidiary of the Commercial Press, to jointly build a major model for academic publishing and promote the intelligent transformation of the publishing industry.

Profit forecasting and valuation

We are optimistic about the company's ecological layout and card position advantage, and keep the company outperforming the industry rating and target price of 55 yuan unchanged, corresponding 3.8 times 2025EP/S. Currently, the transaction is 3.3 times 2025 EP/S, with 14.0% upside.

risks

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