Core views

We are optimistic about the company from the following three aspects:

1. The company actively implements shareholder return measures. Looking at dividends, the dividend rate for the first half of the year reached 77.36%; looking at repurchases, controlling shareholders have increased their holdings by more than 1% this year.

2. The core business is stable. Looking ahead to the second half of the year, pressure factors in the first half of the year, such as core business and investment benefits, are expected to improve. Looking at the main business, the month-on-month performance of Wingman Network and Fuchun Cloud has returned to growth in the first half of the year. Business adjustments have basically come to an end, and they have regained a steady growth trend. Looking at investment returns, benefiting from the strengthening of the market in the second half of the year, investment in wireless media and other stocks is expected to bring significant investment returns.

3. The innovative business layout is progressing steadily. Two of the eight major data element policies of the National Data Administration have been introduced. The focus will be on the morning of the 10th. The director will hold a press conference on public data development and utilization policies. In September, we began in-depth cooperation with Ali in nine areas, including strengthening the interface between technology and applications, promoting data element market exploration, and deepening IDC business cooperation.

We expect the company to achieve net profit of 0.509/0.554/0.584 billion yuan in 2024-2026, a year-on-year ratio of -23.22%/+8.80%/+5.42%. The PE corresponding to the closing price on October 8, 2024 is 27.68/25.44/24.13x.

Brief review

1. Recent changes: Data element policies have been introduced one after another, shareholder returns are positive, Ali has deep cooperation, and strong investment returns focus on recent changes in Zhejiang's digital culture. The company has positive measures in terms of shareholder returns, and has also established a deep cooperative relationship with Ali. Regarding the data exchange, the company is continuing to promote the consolidation of the Zhejiang Big Data Exchange Center, and it is recommended to continue to pay attention to changes in business information. The situation is as follows:

1. The enterprise data resource development policy, which is one of the eight data element policies, recently released a draft for comments on promoting enterprise data resource development by the National Data Administration. On September 27, the National Data Bureau drafted and issued “Opinions on Promoting the Development and Utilization of Enterprise Data Resources” to solicit comments from the public. The period is from September 27 to October 11, 2024. The “Draft for Solicitation of Comments” further clearly promotes the separate operation of data holding, use, and management rights, and also encourages the exploration of new market-based and scenario-based models of “authorized use and revenue sharing”. In terms of data circulation, the “Draft for Solicitation of Comments” focuses on encouraging exploration of diversified data circulation and utilization methods, developing new business formats such as data brokerage and data hosting, and improving the efficiency of matching supply and demand.

Two of the eight data element policies have been published. According to the official website of the National Development and Reform Commission, Liu Liehong, director of the National Data Administration, stated at a press conference on the “Promoting High-Quality Development” series at the Guoxin Office on July 22 that he will study and draft various system and rule documents such as data property rights, circulation transactions, revenue distribution, security governance, development and utilization of public data and enterprise data, high-quality development of the digital economy, and data infrastructure construction guidelines. On September 27, the National Data Administration issued “Guiding Opinions on Promoting High-Quality Development of the Data Industry” and “Opinions on Promoting the Development and Utilization of Enterprise Data Resources” respectively.

On the morning of the 10th, the Director of the Data Bureau will hold a press conference on the public data policy. According to the Financial Federation, at 10 a.m. on October 10, at a press conference hosted by the Information Office of the State Council, Liu Liehong, director of the National Data Administration, will introduce the development and utilization of public data resources and answer questions from reporters. Meanwhile, the Zhejiang Big Data Trading Center, a subsidiary of Zhejiang Digital Culture, has been connected to public data in many regions of the province, and it is expected that the business regulation measures for more exchanges will be clarified in this policy on the use and development of public data.

2. Positive shareholder return measures

1) The dividend rate for the first half of the year was over 77%. According to the semi-annual report, the company plans to distribute a cash dividend of 0.09 yuan (tax included) per share to all shareholders, which is expected to total 0.114 billion yuan. Based on net profit attributable to mother in the first half of 2024, the dividend rate will reach 77.36%.

2) The controlling shareholder's cumulative holdings increased by more than 1% this year. As of the close of trading on September 30, Zhejiang Pao Group, the controlling shareholder of the company, had increased its shareholding by 12.66 million shares from December 29, 2023 to September 30, 2024, accounting for 1.0002% of the company's total share capital. According to the company's official account, Zhejiang Daily Group has launched two rounds of increasing its holdings within a year. The second round of increasing holdings began in early July this year, less than half a month until the end of the previous round of increasing holdings.

3. The Group and the company deepen cooperation with Ali. According to Chao News, Zhejiang Daily Group and Ali reached a deepening strategic cooperation on September 26. The two sides will focus on in-depth cooperation in fields such as cultural service intelligence, large-scale model application, data business collaboration, domestic and international communication, and talent training. Specifically, as far as Zhejiang digital culture is concerned, it will be carried out in nine areas, including strengthening the interface between technology and applications, promoting market exploration of data elements, and deepening IDC business cooperation. According to the strategic cooperation agreement between the two parties, some key collaborations include:

1) Data elements: Zhejiang Newspaper Group cooperated with Linyang, a subsidiary of Ali, to establish a Zhejiang data element scenario demonstration innovation base, establish a regular exchange mechanism, release the value of data elements, and jointly build the “Zhejiang Digital Business” gold sign. The two sides will also cooperate to establish the DingTalk Zone on the Zhejiang Big Data Trading Service Platform to deeply empower data asset value-added and intelligent application implementation, and jointly explore new paths and models for the development and utilization of data elements.

2) Integrated media: Relying on the advanced AI capabilities of the Tongyi Big Model, Zhejiang Digital Culture and Ali will explore and practice cutting-edge technology in various fields such as media image content creation, audio and video content creation, and intelligent applications to inject new technological engine impetus into the provincial communication system. The two sides will promote the upgrading of the “Tianmu Blue Cloud” platform and strengthen the construction of a “one network” for media in Zhejiang Province.

3) Cultural Services: The first “AI+” city roaming platform “45 Degrees”, jointly created by Zhejiang Digital Culture and Alibaba Tongyi, appeared at the 3rd Global Digital Trade Fair. The “45 Degrees” cultural service platform provides users with one-stop urban cultural life experience solutions such as urban and outdoor hiking, mass event registration, venue reservations, exhibition lectures, etc.

4. Wireless media invested by its fund landed on the GEM. Zhejiang Digital Culture successfully landed on the GEM on September 26, a corporate wireless media invested by Park Ying Guosha Foundation. By the close of trading on September 30, wireless media had increased by 498.34%. According to Wind, Zhejiang Digital Culture indirectly holds 0.32% of the company's shares, about 1.29 million shares, and can contribute 0.195 billion yuan of investment benefits as of September 30.

2. The core business regained month-on-month growth in the first half of the year

From a fundamental perspective, Zhejiang Digital Culture's performance in the first half of 2024 increased steadily compared to the second half of 2023. Although judging from the year-on-year data, Zhejiang Digital Culture's profit declined markedly. The main reason is that, on the one hand, the revenue and profit adjustments of Wingman Network in the first half of 2024 were due to the strategic contraction of social networking services; on the other hand, the net return on investment and net return on changes in fair value in the first half of 2024 was significantly lower than the same period in 2023. However, looking at the month-on-month comparison, Winger Network achieved net profit of 0.257 billion yuan in the first half of the year, an increase of 11.43% over the previous year, while Fuchun Cloud achieved net profit of 0.043 billion yuan, an increase of 36.04% over the previous year. As a result, the strategic adjustment of the main business in the first half of the year was basically completed, and the core business achieved steady growth. Therefore, looking ahead to the second half of the year, I am optimistic that the main business performance and investment income will show a year-on-year improvement trend.

1. Wingman Network: The gaming and marketing business is still stable. Among them, the game business continues to implement a boutique strategy. Winger Whipped Egg Daily has surpassed 1 million at the beginning of this year, and added more than 13 million new registered users in the first half of the year; in terms of marketing, Jiutian Interactive and other subsidiaries have obtained commercial advertising agency qualifications from many leading platforms. Looking ahead to the whole year, the game boutique strategy promoted the steady development of games. Sales expenses declined slightly from month to month in the second quarter, and the pressure on purchasing volume slowed down; optimistic about the marketing business will bring new business growth to the company.

2. Fuchun Cloud: Judging from the first half of the year's results, its Hangzhou Fuyang Data Center maintained a high electricity rate, while the Beijing Sijiqing Data Center still has room to grow, and the company continues to increase sales efforts. Furthermore, according to the announcement, Fuchun Cloud is focusing on the combination of IDC energy saving and large models to explore the development of AI smart energy saving platforms. It is recommended to continue to monitor the sales situation of the Beijing data center and the construction progress of the Hangzhou Dajiangdong data center project.

3. Innovative business:

1) Digital technology business: Communication brain and the vertical model of Hangzhou Urban Brain have all been registered online. According to the announcement, the company's two major models have all passed the online registration. Among them, the communication model developed by Communication Brain Technology Company became the first media-exclusive large-scale model developed by a media technology company in the country and successfully passed the filing. Hangzhou City Brain Co., Ltd.'s social governance big model algorithm passed the National Internet Information Office's domestic in-depth synthesis service algorithm registration.

2) Data operation business: The construction of a special area for the Zhejiang Big Data Trading Center continues to increase. The trading center launched the Nanhu Zone, Cultural Tourism Data, and Southeast Zhejiang Industrial Data Zone in the first half of the year. As a result, data supply also continued to grow.

Investment advice:

We are optimistic about the company from the following three aspects:

1. The company actively implements shareholder return measures. Looking at dividends, the dividend rate for the first half of the year reached 77.36%; looking at repurchases, controlling shareholders have increased their holdings by more than 1% this year.

2. The core business is stable. Looking ahead to the second half of the year, pressure factors in the first half of the year, such as core business and investment benefits, are expected to improve. Looking at the main business, the month-on-month performance of Wingman Network and Fuchun Cloud has returned to growth in the first half of the year. Business adjustments have basically come to an end, and they have regained a steady growth trend. Looking at investment returns, benefiting from the strengthening of the market in the second half of the year, investment in wireless media and other stocks is expected to bring significant investment returns.

3. The innovative business layout is progressing steadily. Two of the eight major data element policies of the National Data Administration have been introduced. The focus will be on the morning of the 10th. The director will hold a press conference on public data development and utilization policies. In September, we began in-depth cooperation with Ali in nine areas, including strengthening the interface between technology and applications, promoting data element market exploration, and deepening IDC business cooperation.

We expect the company to achieve net profit of 0.509/0.554/0.584 billion yuan in 2024-2026, a year-on-year ratio of -23.22%/+8.80%/+5.42%. The PE corresponding to the closing price on October 8, 2024 is 27.68/25.44/24.13x.

Risk analysis

The risk of macroeconomic fluctuations, the risk of data transaction pilot policies falling short of expectations, the risk of tightening privacy protection policies, the risk of data transaction supervision, the risk of data resource prices rising, the risk that the fair value of data is difficult to determine, the risk of data supply falling short of expectations, the risk of customer demand falling short of expectations, the risk of customer backgrounds facing regulatory risks, the risk of data transaction infrastructure construction falling short of expectations, the risk of encryption algorithms being breached, the risk of disclosure of personal privacy, the risk of increased competition among exchanges, the risk of data service providers facing strict qualification supervision, failure of business model innovation Risk, risk of loss of core talent, risk of intellectual property protection.