360 Security Technology ( CH)_Upgrade to Hold_ AI monetisation accelerates

Summary of 360 Security Technology (601360 CH) Equity Research Report Company Overview - Company: 360 Security Technology - Industry: IT Services - Date of Report: 21 February 2025 Key Points AI Monetisation and Business Growth - The company has accelerated its AI monetisation, particularly through its AI search and office businesses, which are expected to significantly contribute to earnings growth [2][3][12] - The launch of 'Nano AI Search' on 27 November 2024 has resulted in over 4 million downloads and a monthly active user (MAU) count exceeding 1 million as of January 2025 [20][21] - Revenue from AI search is projected to be RMB 481 million in 2025 and RMB 566 million in 2026 [3][21] - The AI office VIP subscription model is expected to generate revenues of RMB 412 million, RMB 693 million, and RMB 1,009 million from 2024 to 2026, respectively [3][26] Financial Estimates and Adjustments - The 2024 EPS estimate has been revised to a loss of RMB 0.13, while the 2025 EPS estimate has been cut by 37% [4][33] - The company anticipates AI businesses to account for 5% of total revenue in 2024, increasing to 13% in 2025, and 19% in 2026 [29] - Traditional business revenue estimates have been reduced by 17% for 2024 and 18% for 2025 due to intense competition and declining demand [4][29] Valuation and Target Price - The target price has been raised to RMB 12.10 from RMB 4.40, reflecting a market capitalisation of RMB 84.5 billion [5][36] - The stock is currently trading at an 8.4x 2026 estimated price-to-sales (PS) ratio, in line with peer averages [2][5] Revenue and Profitability Metrics - Revenue for 2024 is estimated at RMB 7,906 million, with a projected growth to RMB 9,862 million by 2026 [13][29] - The company expects a net profit of RMB 732 million in 2026, following a net loss of RMB 885 million in 2024 [33][34] - Gross margin estimates have been raised due to a shift towards higher-margin AI-related businesses, with projections of 65.3%, 67.1%, and 67.9% for 2024, 2025, and 2026, respectively [29][34] Risks and Considerations - The report highlights potential risks associated with the company's reliance on AI monetisation and the competitive landscape in traditional internet businesses [5][36] - The investment thesis may change if AI monetisation accelerates beyond current expectations [5][36] Other Notable Information - The company has over 400 million average MAU for its PC browser and navigation, indicating a large potential user base for its AI VIP services [26] - The AI VIP system launched in June 2024 has seen active membership growth, reaching over 400,000 by December 2024 [25][26] This summary encapsulates the critical insights and financial projections for 360 Security Technology, reflecting its strategic focus on AI monetisation and the challenges faced in traditional business segments.