Revenue in 2022 fell short of our expectations, and profits were basically in line with our expectations that Huiliang Technology announced its 2022 results: revenue rose 18.4% year over year to 890 million US dollars, lower than our and market expectations, mainly because the decline in the network affiliate business exceeded expectations; adjusted net profit of Fumo recorded 14.5 million US dollars (excluding one-time revenue from divestment by big media, adjusted net profit of -34.28 million US dollars), which is basically in line with our expectations.

Development trends

Macro challenges remain, and focus on infrastructure. In 2022, due to multiple macro factors, advertisers were more cautious about marketing budgets, and Huiliang's business development faced a certain headwind: annual ad technology revenue increased 17.2% year over year to 880 million US dollars, of which the programmatic advertising platform Mintegral's revenue slowed to 43.5% year on year; the network affiliate business Nativex was more impacted, with revenue falling 68.1% year on year to 56.65 million US dollars in 2022. On the other hand, we saw: 1) advertiser demand showed a recovery trend, and Mintegral's turnover resumed positive month-on-month growth in the fourth quarter of 2022; 2) 2022 Huiliang invested heavily in the iterative upgrade of the algorithm platform, and system capabilities and R&D efficiency improved significantly. The share of medium to heavy games in Mintegral's revenue increased from 15% in the fourth quarter of 2021 to 23% in the fourth quarter of 2022. Management said that the company will continue to refine the intelligent bidding system, and the ROAS (Return on Ad Spend) system is expected to be launched before June 30, 2023.

Focus on profitability and achieve break-even in the fourth quarter. During the reporting period, Huiliang placed more emphasis on profit control, actively curtailed some loss-based investments, and reduced the number of people in the central and back-office intelligence departments. In 2022, the company's gross margin increased 3.7 percentage points year-on-year to 19.8%, and Mintegral's business achieved break-even in the fourth quarter. We believe that, benefiting from the upgrading of the company's system capabilities and the attempt to reduce costs and increase efficiency, Huiliang is expected to achieve full-year break-even in 2023.

Seize new opportunities in the era of big models. Mintegral first launched a deep learning model in 2019, and has now deployed real-time models with multiple 10-billion-scale parameters throughout the life cycle of an advertising system. Management said that the big language model and the programmatic advertising model will complement each other, and the company plans to establish a team in Silicon Valley to seize the big model opportunities. We believe that programmatic advertising is one of the first fields where AI was applied on a large scale. The company's experiments in the field of large-scale models will improve the efficiency of both material generation and matching, help the development of hot cloud services, and improve the service portfolio of programmatic advertising throughout the life cycle.

Profit forecasting and valuation

Considering the uncertainty in the macro advertising market, we carefully lowered our 2023 revenue forecast by 11.8% to $1.11 billion; considering algorithm upgrades and efficiency improvements, we raised the adjusted net profit forecast for 2023 from $11.88 million to $311 million. Introducing the 2024 forecast: projected revenue of $1.38 billion and adjusted net profit of $63.19 million. Maintain an outperforming industry rating and target price of HK$5.6 (based on the 2023 Segment Plus Aggregate Valuation Act, based on the macro environment and company's business progress, we believe the advertising business will reach a steady net interest rate in 2026). The company is currently trading 0.8 times the 2023 market sales rate, and our target price has room to rise 34.3% from the current stock price.

risks

Changes in the international environment; risk of impairment of goodwill; uncertainty about entering new vertical industries; regulatory risk.