Huatai maintains a "buy" rating on Dao Foods International Inc. (DAO.US) with a target price of $8.33.

Recently, education technology company NetEase Youdao (NYSE: DAO.US) released its unaudited financial report for the fourth quarter of 2023 and the fiscal year 2023. The financial report shows that Youdao's net revenue reached 1.48 billion yuan in the fourth quarter, continuing to grow year-on-year; operating profit and operating cash net inflow both reached historical highs. Operating profit achieved a single quarter profit of 80 million yuan, a year-on-year increase of 209.2%, and operating cash flow net inflow of 160 million yuan, a year-on-year increase of 91.0%. In response to this performance, Huatai released a latest report stating that the target price based on SOTP is $8.33, and they continue to maintain a "buy" rating for Youdao. In this report, Huatai pointed out that Youdao has strong productization capabilities, and its advantageous businesses continue to exert force. In the fourth quarter of 2023, the company achieved revenue of 1.481 billion yuan (vs Bloomberg's expected 1.442 billion), with learning services at 784 million yuan, smart hardware at 220 million yuan, and online marketing at 470 million yuan. With the catalysis of the "Regulations on External Training Management (Draft for Solicitation of Comments)" on February 8, industry boundaries are becoming increasingly clear, and companies with excellent product capabilities are expected to stand out. The company focuses on high school education in its main education business, and will expand into non-subject businesses in 2024, contributing to revenue growth; the online marketing business benefits from years of data, traffic, and technology accumulation, and still has untapped potential; the smart hardware sector has a clear path to reduce losses. Overall, the company remains a leading online learning service company, and with the recovery of industry demand, revenue is expected to reach 6.46 billion yuan in 2024-2026E. Regarding the development of Youdao's various business sectors in 2024, Huatai believes that digital content services will continue to focus on strengthening product competitiveness. Youdao Leading World will mainly undertake the company's course services and currently occupies a leading position in the industry. Youdao Bowen has also launched a major new version of its core courses, expanding to more age groups and offering more duration options. It is expected that in 2024, Youdao will provide more non-subject products at the K12 stage, which is expected to further increase revenue. In terms of advertising business, Youdao's advertising business saw rapid growth in 2023, achieving revenue of 1.3 billion yuan (yoy + 98.1%). This is partly due to the steady growth of the domestic advertising market, and also because Youdao ADS is actively expanding overseas markets to provide digital marketing solutions for Chinese enterprise brand promotion, global internet celebrity marketing, and overseas advertising placement, specializing in offering translation services in 108 languages and covering 75 countries. The Huatai report indicates that with the continued application of AI technology, high growth in the company's advertising business can be expected in 2024. Regarding the smart hardware sector, Huatai believes that the hardware business had revenue of 910 million yuan in 2023, mainly due to the impact of industry demand and internal channel optimization. Youdao recently launched the mid-range product A6 Pro dictionary pen, which sold 50,000 units in the first week. After adaptation, the product's gross profit margin remains stable and is expected to drive the recovery of hardware revenue in 2024. Lastly, Huatai mentioned that using the SOTP valuation method, considering that the learning services business, mainly focusing on high school and STEAM courses, contributes the majority of revenue and has a relatively mature business model, they give a target market value of $1.034 billion for Youdao in 2024E, corresponding to a target price of $8.33.