The 2023 results were in line with the forecast and fell below our expectations; the 1Q24 performance fell short of expectations. The company announced the 2023 results: revenue of 4.78 billion yuan, up 22.5% year on year; net loss to mother increased by 1.05 billion yuan, falling into the forecast net loss range of 800 to 1.2 billion yuan; deducted non-net loss of 1.08 billion yuan, which increased year-on-year loss and fell into the forecast non-net loss range of 800 to 1.2 billion yuan. The company's revenue was slightly lower than our expectations, and losses were greater than expected. We determined that the main reason was that gross margin was lower than expected, and credit impairment and asset impairment losses totaled 470 million yuan, which dragged down profits. At the same time, 1Q24 results were announced: revenue of 1.58 billion yuan, up 43.4% year on year; net loss to mother was 94.24 million yuan, and loss increased year on year. 1Q24 revenue was better than our expectations, but profit was lower than our expectations. We determined that the main reason was that gross margin was slightly lower than expected, while expenses exceeded expectations.
Development trends
Revenue and gross margin of the main social e-commerce business in 2023 affected profits, and impairment losses also dragged down. In 2023, the company's social e-commerce business (new caliber) revenue fell 24% year on year to 1.7 billion yuan. We believe that the online live streaming business declined mainly due to factors such as broadcast rate and the company's internal operating efficiency, but we judge that 2H23's main business revenue has stabilized. Referring to the data disclosed by social e-commerce services (old caliber, including proprietary brands and brand distribution revenue under the new caliber), 2H23's revenue increased 3.2% year over year. In terms of gross margin, social e-commerce declined by 23ppt to -0.4% in 2023. We judge that “Yuanwang X27” is mainly in the investment period, generating upfront expenses such as space and personnel. In addition, in 2023, the company experienced asset impairment losses of 130 million yuan and credit impairment losses of 340 million yuan, which mainly depreciated losses totaling 110 million yuan in goodwill impairment losses of fashion media business subsidiaries, while the latter was bad debt losses.
1Q24 social e-commerce GMV grew rapidly, and gross margin recovered month-on-month. According to the company's announcement, 1Q24 achieved GMV of 4.5 billion yuan, an increase of about 80% over the previous year. We judge that the growth drivers include: 1) the “Yuanwang X27” offline live streaming theme mall officially opened, and production capacity was gradually released; 2) the company strengthened cooperation with anchors, enhanced internal operational efficiency, or increased broadcast rates. In terms of gross margin, 1Q24 was 8.1%, a year-on-year decrease of 1ppt and a month-on-month increase of 10ppt. We believe that along with the volume of the company's revenue, operating leverage may gradually become apparent.
Follow the “Yuanwang X27” GMV release and the company's new business development. We believe that the company's Yuanwang Cloud system, supply chain SaaS platform and live streaming operation system are expected to cooperate well with the “Yuanwang X27” offline live streaming theme shopping mall model, which is expected to expand revenue scale and enhance the company's profit efficiency. In addition, the company is also actively expanding its business margins, including the skit business, co-production of variety shows, offline concerts, etc. Among them, in terms of skits, the company announcement indicated that 1Q24 had achieved turnover of about 80 million yuan.
Profit forecasting and valuation
Considering that the company's gross margin may continue to be under pressure, we reduced net profit to mother in '24 from 230 million yuan to loss of 150 million yuan, and reduced net profit to mother in '25 by 58% to 150 million yuan. The current stock price corresponds to 36 times 25-year P/E. Considering that the company maintains a high level of prosperity on the social e-commerce circuit, and that the company's revenue is expected to grow rapidly and maintain the industry rating, it switched to a 25-year P/E valuation and lowered the target price by 41% to 6.5 yuan, corresponding 40 times 25-year P/E, with a potential upside of 11%.
risks
GMV's growth fell short of expectations, the supply chain business fell short of expectations, changes in the value distribution of the live streaming industry chain, and the expansion of new businesses such as AI virtual people and skits fell short of expectations.