Incident: 1) AIwatch.ai released the April list of global AI products. The performance of more than 360 AI products was impressive. 360AI search ranked third in the domestic ranking of AI products, and the number of visits increased 1,300% month-on-month in April 2024. 2) The company publishes the 2023 annual report and the first quarter report of 2024. In 2023, the company achieved operating income of 9.055 billion yuan, a year-on-year decrease of 4.89%; net profit to mother was 492 million yuan, and losses narrowed 77.65% year on year (2.204 billion yuan in the same period last year), and the company's net cash flow from operating activities was 924 million yuan, an increase of 65.84% year on year. In Q1 2024, the company achieved operating income of 1,719 billion yuan, a year-on-year decrease of 12.53%; realized net profit to mother of -110 million yuan, and losses narrowed by 40.86% year-on-year (-186 million yuan in the same period last year).

Revenue from all Internet products has increased dramatically, and AI has promoted the high-quality development of Internet and security services. 1) In 2023, the company's Internet business revenue was 5.620 billion yuan, a year-on-year decrease of 2.95%. Among them, revenue from all Internet products was 138 million yuan, an increase of 65.58% over 2022, and the membership base was gradually consolidated. By the end of 2023, the average MAU of the company's PC security products reached 470 million, and the security market continued to rank first; the PC browser and navigation MAU reached 411 million, with a market share of 86.85%, and the browser market continued to rank first. In 2024, as AI applications such as “360AI Search” and “360AI Browser” gradually mature, the company's overall product market share and PC traffic are expected to further increase. 2) In 2023, the digital security business revenue was 1.765 billion yuan, a year-on-year decrease of 1.48%. In 2023, the company released the industry's first major safety model, the “360 Safety Big Model”. 3) In 2023, the smart hardware business achieved related revenue of 1,570 billion yuan, a year-on-year decrease of 16.80%, and a gross profit margin of 28.81%, an increase of 6.39 percentage points over the previous year.

The AI product matrix is constantly being updated, and the big model has brought the company a second growth curve. As the second-largest search engine manufacturer in China, the company has natural leading advantages in technology, data, search enhancements, and computational power/capital reserves. By the end of 2023, the company's monetary capital was 26.105 billion yuan, and sufficient capital reserves can be used for the construction and efficiency improvement of computing power centers. In 2023, the company will connect the “360 Smart Brain 4.0” model capabilities to 360's full range of Internet products, and will successively launch value-added AI services, shifting the original revenue model mainly based on advertiser payments to value-added service revenue and optimizing the revenue structure. In 2024, on the basis of consolidating the original superior products, the company will continue to expand new products using the office scene as an opening point. According to the “Global AI Product April List” published by AIWatch.ai, 360AI Search ranked third in the overall domestic AI product list, first in the global growth rate list, first in the domestic growth rate list, and fourth in the global search engine list. The number of visits in April increased 1,300% over the previous month. 360 Soda Office and Quick Edit, which were on the list during the same period, ranked 47th and 49th respectively in the overall domestic ranking of AI products.

Profit forecast: Considering the continuous upfront investment in the field of the company's large layout model, the 24-25 net profit forecast was lowered to 0.49/203 million yuan (adjustment range -96%/-86%); the 2026 net profit forecast value of 543 million yuan was added. Optimistic about the central position of the company's big model in the development of the AI industry, and maintain the “gain” rating.

Risk warning: Big model technology development falls short of expectations, Internet business recovery falls short of expectations, and market competition intensifies.