AI Digital Employees Will Drive Powerful Long Term Earnings Upside

Catalysts

About Bairong

Bairong provides AI driven risk management and Generative AI agent solutions that help financial and enterprise clients improve decision-making, marketing and operations.

What are the underlying business or industry changes driving this perspective?

• Accelerating commercialization of the CybotStar agent platform and AvatarGPT across banking, insurance and wealth management is expanding high value use cases such as credit assessment, ESG scoring and customer service. This development supports sustained double digit BaaS and MaaS revenue growth.
• Deep integration of proprietary BR LLM, BR Coder and intelligent voice models into mission critical workflows is creating a high switching cost ecosystem for over 8,000 institutional clients. This is likely to drive higher ARPU and more recurring cloud based revenue.
• Rapid adoption of AI native "digital employees" that convert client spending from CapEx software projects to OpEx service fees positions Bairong to capture a growing share of enterprise AI budgets. This trend improves revenue visibility and long term operating leverage.
• Ongoing buildout of a purpose built GPU cluster with up to 1,500 high end cards and heterogeneous computing orchestration enhances model performance and iteration speed. This supports premium pricing and structurally high gross margins.
• Expansion from financial services into broader nonfinancial sectors, using the same AI infrastructure, privacy computing and agent orchestration capabilities, is opening large new addressable markets. This can compound overall earnings growth as fixed R&D is leveraged over more revenue.

Assumptions

This narrative explores a more optimistic perspective on Bairong compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Bairong's revenue will grow by 17.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 9.8% today to 16.0% in 3 years time.
• The bullish analysts expect earnings to reach CN¥832.4 million (and earnings per share of CN¥1.97) by about December 2028, up from CN¥316.5 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥376.4 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, down from 11.5x today. This future PE is lower than the current PE for the HK Capital Markets industry at 18.8x.
• The bullish analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.44%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Extended regulatory tightening in China, including Article 9 on credit products and further measures on insurance commissions and product design, could structurally cap growth in key financial verticals that MaaS and BaaS depend on, which would suppress long-term revenue and earnings.
• Persistent pressure on the insurance industry, with commissions continuing to trend down and traditional products being removed from shelves, may limit the recovery of BaaS insurance income and reduce high margin premium-linked fees, which would weigh on net margins and profit growth.
• Ongoing and repeated restrictions on telecom phone connections as authorities combat fraud could permanently constrain high frequency VoiceGPT and AI call-out use cases. This could limit scale benefits in AI voice products and dampen both revenue expansion and gross margin leverage.
• Rising competition from large tech platforms and general purpose model providers in digital humans, agents and financial AI could erode Bairong's pricing power and contract wins over time, which would pressure ARPU, revenue growth and the sustainability of its 73% gross margin profile.
• Sustained heavy investment in computing infrastructure, proprietary models and AI talent without commensurate acceleration in commercialization of CybotStar and AvatarGPT may keep operating expenses elevated for longer. This could constrain operating leverage and slow net profit growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Bairong is HK$15.22, which represents up to two standard deviations above the consensus price target of HK$13.84. This valuation is based on what can be assumed as the expectations of Bairong's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$15.22, and the most bearish reporting a price target of just HK$11.51.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be CN¥5.2 billion, earnings will come to CN¥832.4 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of HK$9.07, the analyst price target of HK$15.22 is 40.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.