Forecast 2Q24 revenue growth 10% year over year
We expect a 10% year-on-year increase on the revenue side and positive growth on the profit side in 2Q24. The company's performance was pressured by the short-term implementation pace of WPS AI, short-term disturbances in B-side licensing demand, and the short-term impact of B-side subscription transformation, which was lower than the market's previous expectations.
Key points of interest
The C-side subscription business may be mainly affected by short-term factors, and AI applications can still support the growth center. The company's WPS AI grayscale pricing was released at the end of March, and the pace of the company's short-term business promotions was delayed from May to June. We believe that the growth rate of the 2Q24 company's personal subscription business may be affected to a certain extent. We expect that by 2Q24, the incremental contribution of WPS AI to revenue will be relatively low. We believe that after short-term fluctuations, combined with AI increments, the year-on-year revenue growth rate may pick up steadily.
B-side licensing mainly dragged down 2Q24 results, and the trend has already reached a low point. The company's localization related orders began to recover in 4Q23, but the trend fluctuated by 2Q24. We expect the company's institutional authorized business revenue to decline significantly in the second quarter, dragging down overall performance; however, the localization construction timeline remains unchanged. We judge that overall localization demand has reached a low point. Looking at the year, we believe that the company's institutional licensing revenue is expected to achieve positive year-on-year growth.
The B-side subscription transformation continues to impact apparent revenue, contractual liabilities, or relatively positive performance. The company began to promote the transformation of venue licensing to a standard subscription model in 2024. Financially, this will be reflected in a slowdown in apparent revenue growth in the current period, but contract debt growth is relatively healthy. We expect this trend to continue in 2Q24. Along with digestion during the transformation period, we expect the apparent growth rate of the company's B-side subscription business to return to a rapid growth range in the future.
Profit forecasting and valuation
Considering that the company's C-side WPS AI implementation pace was slower than expected, B-side licensing demand fluctuated, and the B-side subscription business transformation affected short-term performance, 2024/2025 revenue was reduced by 6.2%/9.7% to 52.02/6.415 billion yuan, and 2024/2025 profit was reduced by 7.3%/7.3% to 1,503/18.85 billion yuan. Considering the decline in the valuation center of the industry sector, the target price was lowered by 30.4% to 266 yuan (based on 45x 2025e P/OCF). There is 29.8% upward room compared to the current price. The current price corresponds to 34.7x 2025eP/OCF. Considering that the company has clear card positions on AI application tracks and high certainty in commercial implementation, it maintains a superior industry rating.
risks
R&D investment exceeded expectations; commercial implementation of WPS AI fell short of expectations; the pace of promotion of localization fell short of expectations.