Yidu Earnings: Signs of Recovery but Consistency Still Needed; Fair Value Up 4% to HKD 5.40

We raise our fair value estimate for Yidu by 4% to HKD 5.40 per share from HKD 5.20, after the company reported fiscal second-half 2024 (ending March) revenue of CNY 451 million. This was a 36% year-on-year increase, driven by the recovery of client spending after the end of the pandemic. In addition, adjusted operating loss for the second half of fiscal 2024 declined by about 50% to CNY 143 million, which is a significant improvement and increases visibility toward breakeven. The profitability improvement was driven by greater scale from the revenue increase. While we are encouraged by both Yidu’s revenue recovery and improved profitability, we would like to see further progress on both metrics toward its goal of finally achieving breakeven (after adding back stock-based compensation), which we expect in fiscal 2027. Yidu previously provided lofty expectations of 40%-50% revenue growth in fiscal 2023-24, only for the company to miss forecasts significantly, partially due to the pandemic. Given numerous setbacks in the last two fiscal years, we would like to see whether its revenue and profitability continue to improve in fiscal 2025 before becoming more positive in our outlook. Our slight valuation increase reflects modest demand recovery, but we do not believe profitability will improve consistently until at least fiscal 2026, given the company expects elevated research and development expenses in fiscal 2025 as it works on a new large language model.