Core Viewpoint - Keep's earnings forecast indicates a significant reduction in losses for the fiscal year 2025, with a projected loss of approximately 72 million RMB, a substantial decrease of 87% compared to the previous year's loss of 535 million RMB. The company expects to achieve an adjusted net profit of around 25 million RMB, a turnaround from an adjusted net loss of 470 million RMB in the same period last year. This performance is seen as a pivotal moment for the internet fitness sector, which has faced skepticism regarding its "burning cash for growth" strategy. The improvement in profitability is attributed to two strategic pillars: a focus on AI development and optimization of business structure [1][2]. Group 1: Improvement Paths - The first path to improvement is the transformation of AI technology from a "cost center" to a "profit engine." The announcement highlights that through refined operations across all business lines, the operational efficiency of each segment has improved, with high-margin business contributions increasing. This implies that AI technology not only enhances user experience but also reconstructs the operational leverage curve of content. The application of AI-generated content (AIGC) and AI coaches allows Keep to provide personalized guidance to users at near-zero marginal costs, thus driving overall gross margin upward [2][4]. - The second path involves the "active slimming" and "precise focus" of the consumer goods business. The announcement mentions that the company has achieved effective cost control through marketing optimization, supply chain improvements, and enhanced administrative efficiency. This reflects Keep's strategic choice to abandon low-efficiency, low-margin product categories in favor of focusing on advantageous and high-potential categories, developing deeply around core user groups and high-frequency exercise scenarios. The rebound growth of core self-branded categories in the second half of 2025 validates this focus strategy [2][5]. Group 2: Sustainable Profitability and Market Dynamics - Keep's profitability in 2025 is seen as an initial result of strategic adjustments, but the market needs to focus on the sustainability of this profitability. The announcement reveals that Keep's earnings are not solely reliant on cost-cutting but rather on a genuine operational model upgrade achieved through AI technology, converting technological investments into sustainable profit outputs [3][6]. - The traditional fitness industry has long faced a fundamental pain point: the high cost of one-on-one services versus the personalized needs of users. Keep is breaking this "cost wall" with AI technology, evolving from a "content recommendation platform" to an "intelligent generation platform." This evolution allows for the complete release of scale effects, where the marginal cost of content supply approaches zero, and personalized services can be scaled to serve millions of users simultaneously, enhancing operational leverage and gross margins [4][5]. Group 3: User Growth and ARPU Potential - The effects of the strategic transformation are already reflected in operational data. In the first half of 2025, Keep initiated a critical strategic shift by deploying AI infrastructure and restructuring its system platform into an AI coach service system. This adjustment not only changes the technical architecture but also fundamentally reconstructs the business model. The penetration rate of AI features is rapidly increasing, with daily active users (DAU) of AI features reaching approximately 150,000 to 200,000 by July 2025, which is expected to significantly enhance user stickiness and usage duration [6][7]. - The growth of user scale is driven by three factors: a temporary reduction in growth investment to focus on attracting long-term high-value users, the maturity of AI Coach functions allowing for a reasonable growth budget to be reinstated, and the introduction of new content categories through AIGC that will attract a broader audience [7][8]. Group 4: Valuation and Market Perception - The current market valuation of Keep is still largely based on the framework of an "internet fitness platform" or "sports consumer goods company." However, as the AI strategy deepens, the valuation logic is undergoing a qualitative change. The transition from PE (price-to-earnings) valuation to PS (price-to-sales) valuation, and then to PEG (price-to-earnings growth) and comprehensive pricing based on AI user value, represents a typical path for technology companies' valuation leaps. Keep is at the starting point of this leap [7][8]. - The establishment of a profitability turning point in 2025, with adjusted net profit turning positive, signifies that the company has escaped the "bleeding growth" phase. This profitability was achieved during a strategic contraction period focused on core users. Once AI functions mature and growth investments are resumed, both user scale and ARPU are expected to experience a "Davis Double-Click," driving accelerated revenue and profit growth [8][9].

Investment Rating - The report maintains a "Buy" rating for the company with a target price of HKD 8.82 [7][8]. Core Insights - The company achieved a turnaround to profitability with a non-IFRS net profit of HKD 0.1 billion in 1H25, driven by improved gross margins from optimized product mix and disciplined cost control measures [1][5]. - The focus is on an AI-driven business transformation, with significant progress in the deployment of a multi-agent MAS system, iterations of the Keep AI Coach, and innovations in AIGC workflows [1][4]. - The report highlights potential user growth and increased payment rates from upcoming AI feature updates in the app, alongside cost-reduction initiatives to enhance profitability [1][5]. Revenue and Profitability - The company's total revenue for 1H25 was HKD 8.2 billion, a year-on-year decrease of 20.8%, while the gross margin improved to 52.2%, up 6.2 percentage points year-on-year [2][5]. - The self-branded sports products segment saw a revenue decline of 20.9% to HKD 4.0 billion, but its gross margin increased by 3.3 percentage points to 34.8% due to a focus on higher-potential categories [2][5]. - Online membership and paid content revenue decreased by 22.9% to HKD 3.4 billion, with a gross margin of 71.3%, reflecting improved operational efficiency [2][5]. User Metrics - The average monthly active users decreased by 24.2% to 22.49 million in 1H25, while the average revenue per user increased by HKD 0.3 to HKD 6.1 [3][4]. - The subscription membership count averaged 2.79 million, with a penetration rate of 12.4%, indicating a strategic shift towards user retention rather than sheer growth during the AI feature enhancement phase [3][4]. AI Transformation Progress - The company has made significant strides in its AI transformation, achieving three key developments: the completion of the multi-agent MAS infrastructure, continuous iterations of the AI Coach, and advancements in AIGC course production [4][5]. - As of July, the AI core daily active users (DAU) surpassed 150,000, with plans to exceed 1 million by 2025 [4][5]. Financial Forecasts and Valuation Adjustments - Revenue forecasts for 2025, 2026, and 2027 have been adjusted downwards by 15.4%, 7.2%, and 1.4% to HKD 18.3 billion, HKD 21.1 billion, and HKD 23.5 billion respectively, primarily due to the streamlining of non-core inefficient businesses [5][13]. - Non-IFRS net profit forecasts for the same years have been revised upwards to HKD 0.6 billion, HKD 1.0 billion, and HKD 1.6 billion, reflecting improved gross margins and ongoing cost-reduction efforts [5][13]. - The target price-to-sales (PS) ratio for 2025 has been increased to 2.3x, with the target price set at HKD 8.82, which remains at a discount compared to the average of comparable companies [5][13].