CICC: Maintains FOURTH PARADIGM outperforming industry rating, raises target price to HKD 60

According to the report from China International Capital Corporation (CICC), considering that the core business of FOURTH PARADIGM (06682) is growing faster than expected, coupled with the high prosperity of the company's product track in enterprise services, the firm has raised its revenue forecasts for 2025 and 2026 by 3.5% and 7% to RMB 6.476 billion and RMB 7.738 billion, respectively. It has also adjusted its forecast for adjusted net profit attributable to the parent company for 2025 and 2026 to RMB -121 million and RMB -32 million, up to RMB 570 million and RMB 2.69 billion. The company maintains an "outperform" rating for the industry and raises the target price by 9.1% to HKD 60, corresponding to 4.2x/3.5x 2025/2026 P/S, which has an upside potential of 35.9% compared to the current stock price, which is trading at 3.1x/2.6x 2025/2026 P/S. CICC's main points are as follows: Company Announcement on Q1 2025 Operating Conditions In Q1 2025, the company's revenue was RMB 1.077 billion, a year-on-year increase of 30.1%; gross profit was RMB 444 million, also a year-on-year increase of 30.1%, with a gross margin of 41.2%, unchanged year-on-year; the announcement did not disclose profit conditions. The sales of integrated machines are optimistic, and the revenue from the Prophet AI platform slightly exceeded the firm's expectations. Steady Revenue Growth, Continuous Increase in the Proportion of Prophet AI Platform Business On the revenue side, total revenue in Q1 2025 was RMB 1.077 billion, a year-on-year increase of 30.1%. Considering the company's sale of 22% and 44.69% equity in subsidiaries Jianxin Technology and Aipu Gonghua in February and August 2024, respectively, these two companies are excluded from the financial statements, leading the firm to believe that the company's organic growth rate in Q1 2025 is even higher. Among them, revenue from the Prophet AI platform, SHIFT intelligent solutions, and Shishuo AIGS services was RMB 805 million, RMB 212 million, and RMB 60 million, accounting for 74.8%, 19.7%, and 5.6% of the group's revenue, respectively. Compared to the revenue structure in Q1 2024 of 60.6%, 30.1%, and 9.3%, it further concentrates on core business. Benefiting from the trend of software payment willingness improvement under the DeepSeek industry trend and optimistic sales of integrated machines, the revenue proportion of the Prophet AI platform continues to rise. In Q1 2025, the company had 59 benchmark users covering 14 industries, with an ARPU of RMB 11.67 million, a year-on-year increase of 31.3%. Decrease in R&D Expense Ratio, Release of Technical Accumulation, and Cost Reduction and Efficiency Improvement at the Company Level In Q1 2025, the gross profit amount increased by 30.1% year-on-year, with a gross margin of 41.2%, unchanged year-on-year, indicating that the hardware portion of integrated machines remains stable, while the software demand of the Prophet AI platform is steadily growing. In Q1 2025, R&D expenses were RMB 368 million, a year-on-year increase of 5.7%, with an R&D expense ratio of 34.2%, down 8 percentage points year-on-year. The company insists on investing in R&D innovation, and the scale effect of previous R&D investments has been released. The firm believes that the decrease in the R&D expense ratio is expected to promote the company's pace of loss reduction. Enterprise-level AI Agent + World Model Layout, Entry into Consumer Electronics Brings New Growth Space In Q1 2025, the company promoted the application of AI agents across multiple industries, and in March, it reached a cooperation with Zhiyuan Huilian to jointly explore the Agent layout in the OA field. In addition, the Agent layout includes functions such as customer managers, retail store management, and automotive parts manufacturing. The current key industries include finance, energy and electricity, transportation, and telecommunications, and further penetration into strategic fields such as manufacturing, healthcare, and retail is underway From the perspective of software-defined computing power, the company has launched the SageOne IA integrated machine solution, supporting mainstream models such as DeepSeek V3/R1 and Qwen 2.5, achieving a 3x increase in single-machine multi-task processing efficiency and a 5-10x improvement in inference performance. In March 2025, the company officially announced the establishment of Paradigm Group, creating a new consumer electronics business segment (Phancy) to provide the market with AI Agent-based integrated hardware and software solutions as a new growth curve