The FOURTH PARADIGM announced performance progress as of September 30, with revenue of 3.22 billion yuan (yoy +26.1%) for the first three quarters, gross profit of 1.35 billion yuan (yoy +12.5%), and gross profit margin of 42.0%. 3Q24 revenue 1.35 billion yuan (+24.7%), gross profit 0.56 billion yuan (yoy +13%), gross profit margin 41.4%.

The company's first three quarters were mainly due to strong revenue growth (50.2%) from the Prophet AI platform. We continue to be optimistic about the company: 1) using major customers as a fulcrum to develop new industries and increase penetration in the industries already covered; 2) restructure enterprise software with generative AI with a solid foundation of enterprise service software to meet the needs of enterprises to use large industry models and improve customer experience and development efficiency.

The Prophet AI platform's share of revenue continues to rise

The company's 3Q24 revenue was 1.35 billion yuan, up 24.7% year on year. Among them: 1) The revenue of the Prophet AI platform was 0.92 billion yuan, up 33.5% year on year, and the revenue share increased from 67.0% of 1H24 to 68.1%. The Seer AI platform is the core of all the company's business and the main driving force for the company's revenue growth; 2) SHIFT intelligent solutions business revenue was 0.24 billion yuan, up 7.2% year on year. The revenue growth rate was significantly higher than -22.1% of 1H24. Or mainly due to the impact of the pace of revenue recognition; 3) According to the formula, AIGS service business revenue was 0.2 billion yuan, an increase of 11.0% over the previous year. The company's gross margin for 3Q24 was 41.4%, down 1.8pp from 1h24, or mainly due to the phased impact of the business structure. The company's 3Q24 R&D expenditure ratio was 38.7%, down 6.8pp from 1H24, mainly benefiting from the increase in revenue scale.

AI Agent enabled a variety of solutions, and the “Prophet Inside Model” helped expand its business footprint in the first three quarters of 2024. The company continued to consolidate its leading position in key industries such as transportation, energy and electricity, finance, and operators. The total number of users was 244, including 98 benchmark users, and the benchmark user ARPU was 14.87 million yuan. The company's benchmark user revenue accounted for 45.3%, down from 52.9% of 1H24. The company's industry-leading model development and management platform “Prophet AI Platform 5.0” has achieved end-to-end capacity supply such as computing power layer, model layer, and application layer, and continuously optimizes many key capabilities such as AI Agent and GPU resource pooling. The company added AI Agent capabilities to AIGS Builder, AIGScodex, and various intelligent hardware solutions to improve product reasoning and execution capabilities.

In the first three quarters of 2024, the company collaborated with “Fan Ecology” partners in different fields to create more than 40 AI products through the “Prophet Inside Model”.

A target price of HK$61.33 was given, maintaining the “Buy” rating

Based on the company's forward-looking platform, solutions, and continuous growth of the AIGS business, we maintained a 24-26 revenue forecast of 5/6/7.18 billion yuan (+19%/20%/20% yoy) and maintained a net profit forecast of -0.38/-0.12/0.12 billion yuan. Comparable companies averaged a 2025E PS of 3.9x. Considering the broad industry coverage of the FOURTH PARADIGM, the customer base was mainly large enterprises, which gave the company 4.3x2025E PS (previous value: 5.3x 2024E PS) and a target price of HK$61.33 (previous value: HK$60.95) to maintain “purchase”.

Risk warning: macroeconomic fluctuations; technology implementation falls short of expectations; market competition intensifies.