1H24 results fall short of our expectations

The company announced 1H24 results: achieved revenue of 0.716 billion yuan, an increase of 5.7%; net profit to mother was 0.008 billion yuan, a decrease of 72.8%; after deducting non-net profit of 0.012 billion yuan, a decrease of 39.1%, lower than our expectations, mainly due to increased investment in AI-related R&D during the period. On a quarterly basis, Q1/Q2 revenue was +16.9%/-1.0%, respectively, and net profit margin was -7.7%/7.2%, respectively.

Development trends

1. Revenue from the main business is expected to be under some pressure, and new business expansion is quite impressive. Looking at 1H24's business segment, 1) “What's worth buying” GMV and completed orders fell by 16.1%/1.1%, respectively. We think it was mainly affected by increased competition on online platforms and overall consumption pressure. However, the company further strengthened the creator ecosystem, and the number of content published increased 22%. Among them, the content contributed by users/machines also increased 8.7%/46.0%, the monthly activity of 37.79 million people was relatively stable, and the number of registered users increased 7.0% year-on-year. 2) Continued breakthroughs in new businesses. Among them, Xingluo Innovation was selected as the “No. 1 Super U Election Team Leader during Taobao 618” and the JD League's “Beijing-Wu League Member” certification; Risheng Xingluo switched the focus of proxy operations to the Douyin platform and was awarded the Douyin e-commerce diamond service provider.

2. Gross profit is under pressure due to changes in revenue structure, and cost control is better. The gross margin of 1H24 also decreased by 2.1ppt to 47.0%, which we believe is mainly due to the increase in operating service fee revenue due to lower gross margin. The overall cost control performance was excellent. The 1H24 sales cost rate/management expense ratio decreased by 1.2/0.2ppt to 18.2%/12.6%, respectively; the R&D cost rate also increased by 1.3ppt to 12.6%, mainly due to the increase in AI-related R&D investment. Under the combined impact, 1H24 company's net interest rate/net interest rate after deducting non-net interest rate decreased by 3.1/1.2ppt to 1.1%/1.7%, respectively.

3. AI reshapes GEN2 applications and broadens user and commercial space. The company held a strategy conference in May to officially release the comprehensive AI strategy, upgrade the app to a GEN2 positioning AI native application, fully integrate AI technology, focus on AIUC functions, and finally provide decision suggestions to help users quickly buy high-quality goods. We believe that its application scenarios are wider and are expected to hit a wider range of consumer pain points. At the same time, according to the company's strategy press conference, the company has cooperated with leading model manufacturers such as Dark Side of the Moon and Baichuan Intelligence. We expect to receive traffic dividends in the future, and our AI shopping guide assistant's “small-value” consumption suggestions are more comprehensive, high-quality, and fast, and drastically lower the threshold for UGC users to publish strategies. We believe it is conducive to increasing the platform's high-quality content and expanding the potential customer base. We believe that by improving the ability to “grow grass” good products, the company can provide high-quality product brands with more efficient distribution and enhance the long-term prospects for commercial monetization.

Profit forecasting and valuation

Considering the intensification of competition on online platforms, the company's R&D investment increased in 24, and lowered its 24/25 profit forecast by 28%/21% to 0.076/0.115 billion yuan. The current stock price corresponds to 40/26 times P/E in 24/25. Maintaining an outperforming industry rating, the target price was lowered by 29% to 20 yuan based on profit forecast adjustments, corresponding to 53/35 times P/E in 24/25, with 32% room for growth.

risks

Competition in the industry intensified, new business growth fell short of expectations, macroeconomic environment under pressure, and changes in cybersecurity policies.