Intellifusion Technologies is a highly influential domestic leading artificial intelligence (AI) manufacturer with algorithm chip technology as its core competitive advantage. Backed by strong capabilities to implement AI solutions and rapid earnings growth across different regions and use cases, the Company has grown into a rare integrated platform-based company that offers AI chips, algorithms, and solutions and is therefore well-poised to unlock significant growth potential in the next AI-led innovation cycle. We forecast its 2023E/24E/25E operating revenue to be Rmb583mn/960mn/1.211bn, respectively. Considering the high growth of the AI industry and the Company's stage of development, we assign a target market cap of Rmb25.2bn, corresponding to a target price of Rmb72, and initiate coverage with a “BUY” rating.

Company overview: A fast-growing AI platform-based company that offer AI algorithms, chips and other software-hardware integrated AI solutions, driven by the dual driver of technologies and use cases.

Founded in 2014, Intellifusion Technologies is an AI company that relies on algorithm chip-based capabilities with a deep presence in AI scenario realization, with independently controllable technologies and fast-growing earnings. The Company relies on core technologies to establish competitive barriers, respond quickly to market demand, support the expansion of more use cases, and provide customers with hardware and software products/chips or solutions in the two major areas of digital cities and people’s livelihood. At present, the Company is in the stage of rapid earnings growth and has achieved operating revenue of Rmb230mn/426mn/566mn/546mn in 2019-2022 (+73.2%/+85.0%/+32.7%/-3.4% YoY). We expect that with the gradual recovery of the macro economy, and the accelerated presence buildup of AI by governments and businesses in digital cities and people’s livelihood, the Company's revenue will resume high growth in 2024.

Industry development: The breakthroughs in foundation models greatly accelerate the combination of AI and downstream industries, and corporate competitiveness extends to key underlying technologies such as AI chips.

The potential overall market size of AI exceeds trillions of RMB, and there is strong demand from industries such as urban fine-grained governance, corporate digital transformation, advanced manufacturing, and robotics, etc. In the meantime, the breakthroughs in foundation model technologies have greatly accelerated the combination of AI and downstream industries.

According to Sage's prediction, the emergence of AI in 2030 will bring an additional 14% growth to global gross domestic product (GDP), which is equivalent to an increase of US$15.7trn. The increasing maturity of foundation model technologies will drive the rapid growth of new-generation edge devices and AI chips, allowing them to hurtle into the "iPhone moment of AI", ie, a defining breakthrough moment in AI technologies, and Gartner expects domestic edge AI chip market size to exceed US$11bn in 2025. AI, which is considered as China’s high point of science and technology, has received　　strong policy support. Intellifusion Technologies, by following the national “core technology, independent and controllable” route, stands well to fully benefit from urban fine-grained governance, intelligent transportation, intelligent parks, and intelligent business scenarios. We believe that the competitiveness of future AI enterprises will be comprehensively assessed by the cost-effectiveness of the underlying hardware, system algorithm performance/flexibility, scenario realization capabilities, the depth of industry services and other factors, and integrated and platform-based AI enterprises with the capabilities of chips, algorithms, and strong realization of solutions, represented by Intellifusion Technologies, may have greater growth potential.

Company advantages: Having been deeply engaged in AI, the Company has been developing towards a software-hardware integrated platform-based enterprise by building algorithm and chip barriers. 1) Engaged in exploring use cases, implementing two core strategies of “scenario expansion and urban replica”: Intellifusion Technologies is one of the first in the industry to realize the large-scale realization of dynamic portrait systems, with outstanding scenario realization capabilities. As for digital cities, the Company started off with intelligent police and then actively promoted scenario migration, gradually venturing into pan-scenarios including security, transportation, emergency response, health supervision, etc. As for people’s livelihood, the Company made intelligent parks and intelligent pan-commercial markets as starting points, and then rapidly spread to intelligent communities, buildings, robotics platforms and other areas. Its business started from Shenzhen and then smoothly expanded to lighthouse cities such as Qingdao and Chengdu. In the meantime, it has generated cluster effect through the radiation expansion to the surrounding cities leveraging strong technical strength and program effect. 2) Using core algorithm and chip-based barriers to build a new-generation AI computing platform for autonomous machines: The Company has deeply engaged in optimizing scenario algorithms, using algorithm chips as the core barriers. Its self-developed chip DeepEdge10 was optimized for Transformer at the beginning of the design, allowing it to be applied in Llama-2-7B, lightweight Tianshu foundation models (7B), etc. The goal is to build a new-generation AI computing platform for autonomous machines. In addition, the Company has also developed its own intellectual property (IP), and the deep learning neural network processor has been iterated to the 4th generation (NNP400T), with the IP licensing business generating independent sales revenue. 3) Securing the customers of sector leaders to solidify earnings growth: Intellifusion Technologies has been closely cooperating with Vanke, China Electronics Optics Valley Union, SEZ Construction Development, and other industry leaders, and has gained momentum in intelligent parks and pan-commercial markets. Meanwhile, it has entered cooperation with HUAWEI to promote AI industry innovation and development based on HUAWEI Ascend. In addition, the Company relies on China Electronics Corporation (the Company's shareholder), an information technology application innovation giant, to participate in the construction of information technology application innovation from top-level design, platform landing to a series of solutions to comprehensively build a presence amid in the software and hardware ecosystem amid the “big times of information technology application innovation”. Based on the above competitive advantages, Intellifusion Technologies will likely become a rare platform-based player in the sector integrating AI chips, algorithms and solution capabilities, which may accelerate its market share expansion.

Potential risks: The leakage of core technologies and the attrition of core technicians; technological iteration; the market competition in the AI industry; the risk of AI policies and systems; the risk of being included in the US Department of Commerce's entity list; the uncertainty in the launching and commercialization of products; slower-than-expected progress of the AI chip business; the Company posting sustained losses; the nonperforming debts in accounts receivable, etc.

Investment recommendation: Intellifusion Technologies is a rare AI leading player in the industry that offers both AI algorithms and AI chips, and its self-developed AI chips will likely start large-scale commercialization. We expect the Company's 2023E-2025E operating revenue to be Rmb583mn/960mn/1.211bn, with net profit at Rmb-444mn/-352mn/197mn. By combining both PS and DCF valuation methods, we assign a target market cap of Rmb25.2bn, corresponding to a target price of Rmb72, and initiate coverage with a “BUY” rating.