Core views

The company's revenue side is stable. 1H24 revenue increased 8.80% year over year, with 2Q24 revenue up 15.23% year over year. Split by industry, 1H24 e-commerce revenue growth rate was 10.32%, higher than the company's overall growth rate; revenue growth rate of application, entertainment agencies and other advertisers was 8.04%.

Looking ahead to the second half of the year, the company will benefit from two major trends:

1) AI technology: Judging from Google and Meta's financial reports, AI has become one of the driving forces for high growth in the advertising business. In May, the company released the “AI+BI+CI” full-link digital solution to expand the service capabilities of advertisers from simple advertising to more scenarios such as advertising material production, product selection decisions, and daily operations, enhancing the company's value as a service provider for overseas enterprises;

2) E-commerce going overseas: The average GMV growth rate of “The Four Little Dragons Outbound” exceeds 130% for the whole year. The high investment demand from overseas e-commerce platforms and e-commerce sellers is expected to continue to contribute to the company's revenue growth.

We expect the company to achieve net profit of 0.261/0.327/0.408 billion yuan in 2024-2026, a year-on-year increase of 20.03%/25.44%/24.92%. The PE corresponding to the closing price on August 19, 2024 is 25.18/20.07/16.07x. Continue to focus on being optimistic and maintain a “buy” rating.

occurrences

The company released its 24-year semi-annual report. In the first half of the year, it achieved operating income of 1.086 billion yuan, an increase of 8.80% over the previous year; net profit to mother of 0.132 billion yuan, an increase of 10.44% over the previous year; net profit after deducting non-return to mother of 0.125 billion yuan, an increase of 17.83% over the previous year.

In the second quarter, the company achieved operating income of 0.605 billion yuan, an increase of 15.23% year on year; net profit to mother was 0.082 billion yuan, up 4.73% year on year; net profit after deducting non-return to mother was 0.079 billion yuan, an increase of 13.10% year on year.

Brief review

1H24 revenue is steady, and the e-commerce industry's revenue growth rate is higher than the company's overall growth rate. 1H24 achieved revenue of 1.086 billion yuan, up 8.80% year over year.

Split by advertiser type, 1H24 e-commerce advertiser revenue was 0.269 billion yuan, up 10.32% year on year, higher than the company's overall revenue growth rate of 8.80%; revenue from app, entertainment agencies and other advertisers was 0.813 billion yuan, up 8.04% year on year. Separated by business type, revenue from performance advertising and marketing services was 1.047 billion, an increase of 11.24% over the previous year, contributing to the main increase in the company's revenue.

After excluding the effects of exchange gains and losses and share payments, the profit side grew rapidly. 1H24's net profit attributable to mother excluding exchange gains and losses was 0.128 billion yuan, up 27.78% year on year; net profit attributable to mother excluding exchange gains and loss and share payments was 0.14 billion yuan, up 39.87% year on year. Looking at the second quarter alone, the company's net profit attributable to mother excluding exchange gains and losses was 0.07 billion yuan, up 29.59% year on year; net profit attributable to mother excluding exchange gains and losses and share payments was 0.076 billion yuan, up 40.84% year on year. The profit growth rate was significantly higher than the revenue growth rate, mainly due to better cost control during the company period, an increase in interest income from superimposed deposits, and a decrease in income tax expenses. 1H24 corporate income tax expenses - 0.02 billion yuan, a year-on-year decrease of 0.045 billion yuan, mainly due to Hong Kong companies' offshore exemption from income tax reduction; interest income from deposits was 0.032 billion yuan, an increase of 0.021 billion yuan over the previous year.

1. AI technology: Lay out full-link AI products and services to enhance its value in the long term. In May 2024, the company released the “AI+BI+CI” full-link digital solution for overseas businesses, which is expected to improve the operating efficiency of overseas enterprises and improve the company's own profitability in the long term. The program covers various fields such as marketing, marketing, and daily business operations, and promotes the company's service capabilities for advertisers from simple advertising to more scenarios such as advertising material production, product selection decisions, and daily operations, and enhances the company's value as a service provider for overseas enterprises, thereby enjoying the dividends of Chinese enterprises going overseas, and bringing about medium- to long-term business development increases. The program mainly consists of three major parts:

1) AIGC digital marketing creation platform KreadOAI: According to the company's official account, KreadOAI successfully passed the Internet Information Office's algorithm filing in June of this year, and updated the popular video generation function in August. Users can generate product explanation videos with one click, and will later support one-click posting to mainstream media platforms such as Google, Meta, Tiktok, Douyin, and video accounts. At present, KreadoAI has covered 203 countries around the world, with more than 1 million registered users, and more than 1 million monthly user visits, and has been recognized by global advertisers such as Brazil, China, India, Europe and the United States.

2) Data analysis and growth model platform digital intelligent BI: The platform is based on the company's annual accumulation of more than 1 billion industry service data, and assists overseas companies to select products and advertise through AI algorithms.

3) Gears, an intelligent multi-cloud management platform: provides overseas enterprises with multiple services and resource tools such as continuous multi-cloud delivery and multi-cloud financial management to reduce the operating costs of overseas enterprises.

Judging from Google and Meta's financial reports, AI has become one of the driving forces behind the high growth of the advertising business. 2Q24 Meta and Google ads increased 22% and 11% year over year, partly driven by AI: 1) Meta: 2Q24 Advantage+ shopping ads drove a 22% increase in return for US advertisers. Meanwhile, over 1 million advertisers used generative AI ad features (image expansion, background, and text generation) for almost a month. Previously, the company revealed that Advantage+ advertising is highly motivated. Advantage+ advertising revenue growth in the full year of 2023 exceeded 100%, and the ARR for 4Q23 reached 10 billion dollars. 2) Google: Q2 released more than 30 new advertising tools. “Virtual Try-On” will be widely launched this year. The feature is 60% more viewed than other images and results in more purchasing decisions and fewer returns; AI-driven profit maximization tools have been integrated into advertising products such as Pmax, and advertisers using the tool have increased their profits by 15% compared to advertisers who only use revenue maximization tools.

As a marketing service provider, the company simultaneously upgrades AI, which not only increases its own value, but also brings about an increase in profit levels. The company uses AI capabilities externally to assist advertisers in generating advertising materials and advertising. It uses an AI knowledge base and AI customer service for internal and some deep partners and customers to achieve 7*24 hour customer service, with an average service response rate close to 90%.

2. High investment demand from overseas e-commerce companies is expected to continue

Expectations for the Four Little Dragons to go overseas are high throughout the year, and high launch demand is expected to continue. With high growth achieved in 23 years, the four e-commerce companies that went overseas set high growth targets in '24, and fierce competition is expected to drive continued high investment demand. According to Delayed Latepost, Temu, Tiktok Shop, AliExpress, and Shein's 2024 sales targets are $600, 500, 875, and 630 dollars, respectively, which is an increase of 233%, 150%, 119%, and 40% compared with actual sales in 2023.

In addition to the high increase in overall scale, structural changes within each platform are also expected to drive launch:

1) Regional expansion: The four major platforms have all expanded from the US to the world. According to LatePost, Temu's share of the US market's overall transaction volume has now dropped from 60% in early 23 to 40%, which is the same as the European market, and plans to further reduce its share of the US market to 30% in 2025. As e-commerce platforms gain strength in new regions, we expect demand for social media advertising in this region to increase.

2) Semi-hosting model promotion: Since this year, e-commerce platforms have successively switched from a fully managed model to a semi-managed model. Among them, Temu launched a semi-managed model in March of this year, and Shein and AliExpress have also launched one after another. Under the full hosting model, merchants only need to be responsible for listing and shipping products to the platform's domestic warehouse, and the platform is responsible for all aspects of product selection, pricing, logistics, and after-sales. Under this model, the platform has a powerful voice and can quickly open up the market through low-priced products, but due to storage costs, the platform generally only ships products overseas after the end customer places an order, resulting in long product delivery times. Under the semi-warehousing model, merchants are responsible for product storage, international logistics, and returns. Platforms generally require merchants to store products in overseas warehouses in advance, thereby shortening delivery time.

According to company announcements, public accounts, and Easy Investor Relations, the company and the “Four Little Dragons Going Overseas” have all reached in-depth cooperation. The high investment demand from overseas e-commerce platforms and e-commerce sellers is expected to continue to contribute to the company's revenue growth.

3. Financial analysis

Q2 There was a slight decline in gross margin. 2Q24's gross profit margin was 17.33%, down 8.17% year on year and 8.55% month on month. We expect that the company's leading customers are more likely to advertise to leading media. For the company, the gross margin of leading media is lower than that of mid-tail media, which has led to a decline in the company's overall gross margin. Top media campaigns performed better. Due to advertisers' budgets, 2Q24 Meta ads increased 22% year over year, exceeding expectations.

Expense control was good, and the cost rate dropped significantly from month to month during the period. The 2Q24 company's expense ratio was 5.97%, the same year-on-year, with a year-on-month decrease of 6.03pct. Among them, the management expense ratio, sales expense ratio, R&D expense ratio, and financial expense ratio were 5.32%, 1.96%, 3.08%, and -4.39%, respectively, -0.81 pct, +0.04pct, -1.33pct, and +1.87pct, respectively, -0.18pct, +0.26pct, -1.54pct, and -4.56pct.

Investment advice: The company's revenue side is stable. 1H24 revenue increased 8.80% year over year, with 2Q24 revenue up 15.23% year over year. Split by industry, 1H24 e-commerce revenue growth rate was 10.32%, higher than the company's overall growth rate; revenue growth rate of application, entertainment agencies and other advertisers was 8.04%. Looking ahead to the second half of the year, the company will benefit from two major trends: 1) AI technology: Judging from Google and Meta financial reports, AI has become one of the driving forces for high growth in the advertising business. In May, the company released the “AI+BI+CI” full-link digital solution to expand advertisers' service capabilities from simple advertising to more scenarios such as ad material production, product selection decisions, and daily operations to enhance the company's value as a service provider for overseas enterprises; 2) E-commerce going overseas: the average GMV expected annual growth rate of the “Four Little Dragons Going Overseas” exceeds 130%, and the high investment demand of overseas e-commerce platforms and e-commerce sellers is expected to continue to contribute to the company's revenue growth.

We expect the company to achieve net profit of 0.261/0.327/0.408 billion yuan in 2024-2026, a year-on-year increase of 20.03%/25.44%/24.92%. The PE corresponding to the closing price on August 19, 2024 is 25.18/20.07/16.07x. Continue to focus on being optimistic and maintain a “buy” rating.

Risk warning: risk that user growth and payment rates for AI products and services fall short of expectations; risk that the cost reduction and efficiency of AI products and services falls short of expectations; risk that new customer expansion falls short of expectations; risk of data security risks brought about by generative AI; risk of deterioration of the global economic environment; antitrust and regulatory risks in the domestic and foreign Internet industry; risk of customers suffering overseas due to geopolitics; risk of increased competition; risk of leading advertisers reducing the budget of leading advertisers; risk of brand customer expansion falling short of expectations; risk of under-expected expansion of cross-border e-commerce Risks, the risk of losing momentum in the game, the risk of rising raw materials and cross-border logistics costs, and the risk of brain drain.