Performance preview
It is forecast that the adjusted profit in the fourth quarter will decline by 25% compared with the same period last year.
We expect the company's fourth-quarter revenue to grow 5% year-on-year to 140.9 billion yuan, adjusted net profit to decline 25% year-on-year to 24.8 billion yuan, and adjusted net profit for the whole of 2021 to increase 1% to 123.7 billion yuan.
Pay attention to the main points
The performance of the game is as expected. We observed that the internal competition between "Arena of Valor" and "League of Legends" mobile games (LOL M) in October led to the growth of both of them, and then the flow returned to normal. "Game for Peace", which was greatly impacted by the implementation of the juvenile protection law, has basically stabilized the pace after several months of operation adjustment. The "LOL M" pipeline is of a similar order of magnitude to the newly launched "Moonlight Blade" in the same period in 2020, but because of its longer deferred cycle, we expect its 4Q revenue contribution to be still lower than that of "Moonlight Blade" in the same period in 2020. Overall, continuing the 3Q trend, 4Q domestic mobile game business continues to reflect the impact of the juvenile protection law, and we expect 4Q's game revenue to grow by 4% year-on-year.
Advertising is still weak. Affected by weak macro demand, stricter regulatory measures, and so on. We believe that the advertising business is still under great pressure in the short term; especially with the further slowdown in the growth rate of e-commerce and the decline in demand in the online service industry, we have lowered the growth assumption of 4Q advertising from the original-8% to-13%. To reflect the possibility that the advertising business is further lower than expected.
Finance and cloud are generally in line with expectations, but growth has slowed due to base reasons. For cloud and enterprise services as well as financial business, the epidemic in 2020 resulted in a low base in the first half of the year, so the growth rate of FBS in the first half of 2021 was as high as 44%, while the overall growth rate gradually normalized in the second half of the year. 3Q's overall growth rate is 30%, and we expect 4Q's year-on-year growth rate to further narrow to 22%.
Profit margins are still under pressure. On the one hand, the revenue growth of the existing business has slowed down, on the other hand, the company has maintained a relatively active investment in new businesses such as video number, cloud and enterprise services, but the monetization of the new business will take time, both of which cause the pressure on the company's profit margin. We expect 4Q's adjusted operating profit margin to decrease from 5.7ppt to 23%, and adjusted net profit margin to 4.7ppt to 17.6%. The adjusted net profit of 4Q was 24.8 billion yuan, down 25% from the same period last year.
Valuation and suggestion
Due to the weak macro consumer environment and the impact of the uncertainty of the epidemic, we cut our 2022 income by 2%. As the company maintains its investment in new business and investment under income pressure, we cut 2021 amp's adjusted net profit by 4% and 6%, respectively. Maintain its neutral rating and cut its target price based on SOTP valuation by 4 per cent to HK $527, corresponding to 33x 2022e non-IFRS PE, which has 13 per cent upside from the current share price. The share price is currently traded at 29x 2022e non-IFRS PE. Introduce profit forecast for 2023.
Risk.
Macroeconomic uncertainty, recurrent outbreaks, regulatory risks, costs or expense rates are higher than expected.