Event: the revenue side is under pressure within expectations, and the profit side loss reduction is higher than expected. The company released 22Q4 financial results, achieving revenue of 6.1 billion yuan, an increase of 6% over the same period last year, basically in line with Bloomberg's consistent expectations; gross profit of 1.25 billion yuan, an increase of 14% over the same period last year, and a gross profit margin of 20.3%, which was improved from the same period last year. The expense side was affected by the one-time expenditure of streamlining personnel, which increased year-on-year. After adjustment, it realized a net loss of 1.31 billion yuan, corresponding to a net loss rate of 21%, significantly improved compared with the same period last year, and exceeded Bloomberg's consensus expectations. From a business point of view:

The product cycle led to the pressure on game revenue in the fourth quarter, focusing on the performance of new products developed by ourselves for 23 years and the beta of the domestic game industry. The revenue of the game business reached 1.15 billion yuan, down 12% from the same period last year, which mainly reflects the natural decline of the stock of products in the fourth quarter. The contribution increment of mobile games with the new tour "Gem Research Story: Ian Stone", "non-anonymous instruction" and "warm Snow" is relatively small. Looking to the future, there are no key products on the line in the short term, superimposed in the fourth quarter of the decline in some delayed confirmation, it is expected that the game business in the first quarter is still under pressure. Since then, it is expected to return to the growth trend with the launch of a series of agent products such as self-developed products such as "Slude", "Elushir: star Dawn" and "Millennium Journey". In addition, with the normalization of the distribution of domestic game version numbers, the product supply is expected to improve significantly during the year, and the launch of a large number of secondary products is expected to bring new increments to the channel business.

The customer end grows healthily, and the stickiness is further improved; live broadcast drives the growth of value-added services, focusing on the marginal improvement of profit margins in 23 years. After changing the focus, the growth of users in the quarter was healthier. In the fourth quarter, sales expenses decreased by 28% compared with the same period last year, while DAU reached 92.8 million, an increase of 29% over the same period last year, and a year-on-year increase of 20%. The stickiness index of Dau Mau users was also raised to 28.5%. The revenue of value-added services reached 2.35 billion yuan, an increase of 24% over the same period last year, which is expected to be mainly driven by the live broadcast business. The number of big members in the quarter rose 7% year-on-year to 21.4 million, which is expected to be mainly driven by the key PGV content "three-body". In addition, the Guochuang animation "China fantastic Tan", which was launched in January 23, has been viewed more than 240 million times. Even in the context of reducing costs and increasing efficiency and controlling content investment, the supply of high-quality PGV content continues. The revenue of the live broadcast business grew by more than 30% in 22 years, and the number of anchors grew by more than 70% in the fourth quarter compared with the same period last year, and the supply side is still expanding. Looking forward to 2023, we believe that based on the advantages of vertical categories such as games, the live broadcast business will continue to maintain steady growth, and with the gradual optimization of the proportion, the profit margin performance will continue to improve.

The growth rate of advertising business is less than expected to reflect the impact of macroeconomic fluctuations, looking forward to the steady expansion of advertising inventory and macroeconomic repair in 23 years. Revenue from the advertising business reached 1.5 billion yuan, down 5% from a year earlier, slightly below Bloomberg's consensus expectations. Taken apart, the year-on-year decline is expected to come mainly from brand-to-brand advertising (including single advertising and regular brand advertising), driven by the expansion of advertising inventory brought about by the average daily VV, which grew 77 per cent year-on-year in this quarter, and effective advertising revenue still grew by more than 50 per cent year-on-year. Looking to the future, it is expected that as the company emphasizes DAU growth, and vertical advertising Story Mode gradually contributes more absolute value of VV, the total inventory of effective advertising will still maintain a relatively rapid growth; while with the gradual repair of the macro-economy, the demand for brands and effective advertisers is expected to pick up, driving the recovery of CPM on the advertising side and the brand to the advertising stream, we are still optimistic about the growth of advertising revenue for the whole year.

Pay attention to the improvement of gross profit margin after optimizing the income structure of e-commerce and other businesses. The revenue of e-commerce and other businesses reached 1.13 billion yuan, an increase of 13% over the same period last year and 50% month-on-month, mainly due to the one-time revenue from the transfer of exclusive broadcasting rights to China's League of Legends World Championship Competition this quarter. With the expiration of the three-year exclusive broadcasting rights contract in 2022, under the overall strategy of increasing income and reducing losses, the low gross profit margin of e-commerce and other businesses may be optimized, which will have a negative impact on the revenue side, but is expected to record a higher gross profit margin in 23.

Profit forecast and investment advice: according to the incremental information brought about by the operating condition of the current quarter, we adjust the company's operating income forecast for 2023-2024 to 25,000,000 yuan, an increase of 14% and 19% over the same period last year. The adjusted homing net profit is expected to reach-35,050 million yuan, corresponding to a net loss rate of 14%. Under the strategy of increasing income and reducing losses for the whole year as the primary goal, the company provides guidance on total revenue in 2023, with a median of 25 billion yuan, lower than the previous Bloomberg consensus. But on the other hand, it makes clear the specific measures to reduce losses: 1) reduce relatively fixed cost items such as bandwidth cost, staff cost, content cost, etc.; 2) reduce the input of sales expenses by focusing on DAU as the focus of user growth, and focus on the game self-research category to reduce R & D expenditure. All in all, we think that the focus of the market in 23 years is on the marginal change of the narrowing slope of the loss rate. On the one hand, under the company's long-leveraged business model, the prosperity of the revenue side will be an important factor. We expect that the revenue side will still be under pressure in the first quarter, and the second quarter quarter-on-quarter is expected to improve significantly, leading to the expansion of the marginal changes in the above slope. On the other hand, the higher-than-expected narrowing is expected to drive the assumption that the market will raise long-term steady-state profit margins, leading to higher valuations and maintaining the company's "buy" rating.

Risk tips: macroeconomic fluctuations; the launch of game products is not as expected; industry supervision is stricter.