Using the power of mergers and acquisitions to transform digital marketing, the three major business maps developed collaboratively. Rio Co., Ltd. was listed in 2007. Its main business was the R&D, design, manufacture and sale of miniature pumps and garden machinery. In 2014, it began to transform into a digital marketing company through mergers and acquisitions. It successively acquired companies such as Amber Communications and Argon-Krypton Interactive, forming a complete service chain covering marketing strategies and creativity, media delivery and execution, performance monitoring and optimization, social marketing, precision marketing, and traffic integration, and entered the leading echelon of the domestic digital marketing industry.
Based on its main business, the company feeds back the development of the main business by investing in advanced technology within the industrial chain and obtaining incremental cash flow. The structure of the three major business maps is clear, and the continuous development of the company is promoted collaboratively.
In-depth cooperation with leading customers and media, and the fundamentals are solid. The company has a huge library of media resources, and has established deep partnerships with leading media platforms such as Byte Massive Engine, Kuaishou Magnetic Engine, Tencent Advertising, JD, and Baidu. The ranking continues to rise, and the overall scale of cooperation has reached 10 billion dollars. At the same time, each of its companies' services focuses on customer resources, covering leading enterprises such as e-commerce, online services, games, education, and media, and has a certain degree of business synergy. Thanks to deep cooperation with customers and media, the company has accumulated rich marketing materials and formed deep marketing insights, all of which have laid a solid foundation for the company to serve customer needs more quickly in technological changes.
Actively promoting the implementation of AIGC's business is expected to drive both performance and valuation. According to information on the company's official website, Leo Digital is Baidu Wenxin's first ecological partner. The company is currently promoting internal testing by the AIGC product team to empower the company's internal work needs for various professional positions such as R&D, creativity, optimization, planning, management, and legal affairs. Looking at the short-term perspective, AIGC's cost reduction and efficiency in optimizing marketing copy, materials, and delivery strategies is expected to drive an increase in business gross margin. Looking at the medium to long term, with AIGC's ability to generate content, the company is expected to improve its bargaining power in the industrial chain, as reflected in: 1) the company is expected to take the lead in proposing corresponding marketing products to obtain service premiums; 2) If the company needs to fine-tune small models for customer characteristics, such models are expected to settle into the company's digital assets, forming a more stable resource barrier; 3) On the media side, in addition to using AIGC to improve matching efficiency, it is also expected to fully benefit from the intensification of the media competition pattern. We believe that many new applications and media games will emerge under the AIGC wave. It is expected that agents will be given a higher rebate policy, and the advantages of agency intermediaries choosing more efficient marketing channels for brands will be highlighted, thereby increasing the value of the agency's industry chain.
Investment suggestions: The company's fundamentals are solid, the machinery manufacturing sector is growing steadily, and the digital marketing sector is expected to usher in post-epidemic recovery. At the same time, the AIGC wave is combined with the upgrade in brand demand, which is expected to increase revenue while driving up gross margin. We expect to achieve net profit of -426 million, 563 million, and 782 million yuan in 2022-2024. The company was given 35 times more PE, combined with Ideal Auto's shareholding (2.7 billion). The corresponding valuation was 22.4 billion yuan, and the corresponding six-month target price was 332 yuan, covering the “Buy-A” rating for the first time.
Risk warning: Technology iteration falls short of expectations, product advancement pace falls short of expectations, cost growth such as computing power exceeds expectations, and investment losses exceed expectations.