Incident: Fangzhi Technology released its 2024 three-quarter report. In the first three quarters of 2024, the company achieved operating income of 0.074 billion yuan, an increase of 7.36% year on year; net profit to mother was 0.019 billion yuan, a decrease of 30.83% year on year.

The increase in expenses dragged down current results. In the first three quarters, the company's sales/management/R&D expenses were 0.021/0.009/0.015 billion yuan respectively, up 53%/16%/6% year-on-year. Among them, the growth rate of sales and management expenses is higher than the growth rate of revenue. Combined with government subsidies and a decrease in investment income, it puts a lot of pressure on current profits.

Strengthen marketing channels. The company focuses on strengthening online operation capabilities, adopting private marketing strategies, and clarifying brand positioning and core concepts. Through activities, contests, communities, etc., we strengthen interaction with users, enhance user stickiness and loyalty, and thus promote user conversion. At the same time, by optimizing the structure and marketing support system of the marketing team, a professional operation team is established, and the operation strategy is continuously optimized.

Vigorously develop the AI business. In the first half of 2024, the company continued to deepen and lead innovative exploration of talent cultivation in the AIGC field, establish deep cooperative relationships with universities and vocational colleges, accurately focus on in-depth analysis of AIGC's core technology and application scenarios, and accelerate the transformation of academic achievements into industrial productivity.

Overseas expansion can be expected. The company upholds an international vision of open cooperation and explores overseas business opportunities. In the first half of the year, its subsidiary Muyu Technology participated in international exhibitions in Indonesia and Abu Dhabi, and won wide praise and high praise for its advanced technology and services.

Investment advice: The company's strong investment on the short-term cost side this year has put pressure on the overall performance. Through financial investment, the company continuously strengthens marketing channels and develops AI business. At the same time, strengthening partnerships with colleges and universities is conducive to the subsequent implementation of AIGC. We are optimistic about the company's development and forecast that the company's revenue for 2024-2026 will be 0.117 billion yuan, 0.141 billion yuan and 0.172 billion yuan, with net profit of 0.033 billion yuan, 0.041 billion yuan and 0.055 billion yuan, corresponding to PE 86X, 70X and 52X, maintaining a “buy” rating.

Risk warning: risk of policy implementation falling short of expectations, risk of industry competition, risk of brain loss, risk of seasonal fluctuations in performance