2023 is in line with the forecast and market expectations, and the 1Q24 results are in line with our expectations. The company announced the 2023 results: revenue of $52.6 billion, up 43%; net profit to mother of 117 million yuan, falling within the forecast range of 1 to 150 million yuan; deducted non-net profit of 150 million yuan, falling within the forecast range of 130 to 180 million yuan. Of this, 4Q23 revenue was $16.3 billion, and net loss to mother was 171 million yuan, after deducting non-net loss of 174 million yuan. 1Q24 performance: Revenue of 15.8 billion yuan, up 61%; net profit to mother of 82.23 million yuan, a decrease of 45%; deducted non-net profit of 79.89 million yuan, a decrease of 41%, in line with our expectations.
Development trends
Revenue from overseas sales and full-case promotion services continued to grow at an impressive rate. Revenue for 4Q23/1Q24 was $163/15.8 billion, respectively, up 61%, continuing the recovery trend since 4Q22. The company said that overall promotion services and overseas advertising increased relatively well, and the revenue of the two major sectors increased by 73%/42% in 2023, respectively. The company said that the ad revenue growth rate of Meta/Google agents in 2023 was in double digits. The revenue growth rate of agents for TikTok For Business was nearly 50%, and it also grew rapidly after starting official agency cooperation with Microsoft Advertising and Pinterest in 2023. By industry, game, e-commerce, internet and app advertisers contributed 30%/46%/109% to revenue, respectively.
Overseas gross margin recovered slightly, but the company's overall gross margin still needed to be raised; credit impairment losses affected profits in 2023. In terms of gross margin, the gross margin of the overseas business recovered (FY23 increased by 0.16ppt to 1.7%), but the gross margin of the full-case promotion/full-case advertising agency business fell 4.4/6.8 ppt in FY23, leaving the company's overall gross margin still affected. The gross margin for FY23/1Q24 was 3.44%/2.94%, respectively, down 1/2ppt. Credit impairment losses were the main factor affecting profits in 2023, totaling $415 million in 2023 (mainly bad debt losses on accounts receivable), of which 4Q23 lost 325 million yuan; 1Q24 also had a loss of 16.57 million yuan.
Expense side expenses were stable, with 4Q23/1Q24 sales rates falling 1.4/0.7ppt, respectively.
AI applications continue to be deepened, and the AI Native model will be developed in 2024. The company said that AI-driven business efficiency will increase by 30% to 1,000% in 2023, and AI-driven revenue will exceed 100 million yuan. Looking forward to 2024, the AI-driven revenue company is expected to increase by 500 to 1 billion yuan. The company said it will build an AI Native model in 2024:1) innovate at the organizational level and establish a team driven by pure AI operations; 2) explore AI-native marketing, content, or generative marketing in terms of new marketing models.
Profit forecasting and valuation
Considering that the gross margin level is still under pressure, the 24/25 deduction of non-net profit was reduced by 26%/27% to 348/378 million yuan. The current stock price corresponds to 44/41 times 24/25 non-P/E deduction. Maintaining a neutral rating, the target price was lowered by 25% to 6.30 yuan due to adjustments in profit forecasts, corresponding to 45 times a 24-year non-P/E deduction, with an upward margin of 2%.
risks
Macroeconomic risks, deteriorating industry competition, declining industrial chain position, low expectations for AI input and output, and impeding overseas business progress.