4q23Non-GAAP net profit fell short of our and market expectations, improving shareholder returns
The company's 4Q23 earnings revenue also increased 7% to 27.1 billion yuan, slightly lower than the agreed forecast of 3%; non-GAAP net profit also increased 53% to 7.38 billion yuan, slightly lower than our expected 3% /7% consistent forecast. We determined that it was mainly due to the seasonal impact of mobile game revenue, and the scale of marketing campaigns for the current season was larger than expected. The company continued to increase shareholder returns, with 4Q23 dividend of $0.216 per share ($1.08/ADS, dividend ratio rising to 75%), and total shareholder return of US$2.34 billion in 2023 (cash dividend+share repurchase), an increase of 12%.
Development trends
Mobile game revenue declined slightly month-on-month in 4Q23, and the profit side fell short of expectations due to high investment in sales expenses during the quarter. The company's 4Q23 mobile game revenue also increased by 29%/fell by 5%. We think the main reason is that 3Q23 is the peak summer season, and the launch of various new products boosted sales, and the turnover of some 4Q23 products naturally declined. In terms of sales expenses, the 4Q23 rate increased 2.1/2.5ppt to 15.6%, and the absolute amount increased 24%/15% to 4.2 billion yuan. Our judgment is partly due to increased investment in the face of a competitive environment such as “Egg Boy Party”.
The stock game performance is relatively stable, and many new products such as “Conjuring” and “Eternity” are ready to be launched during the year; keep an eye on the progress of going overseas. We judged that the product stock performance in the first quarter was relatively stable. Among them, the number of daily active users of “Egg Party” exceeded 40 million during the Spring Festival. We believe that the product stock users are highly sticky, and competitiveness continues to improve within the segmented circuit. In terms of new products, we expect the company to enter the new product cycle starting at the end of the first quarter, with a subsequent focus on: 1) “Escapist” (launched on March 28); 2) “Eternity” mobile game (with an existing version, the first external testing will begin on April 1. The company will indicate in the results that it plans to launch around the second quarter of 2024); 3) “16 Voices of Yan Yun” (follow progress on the PC side). In terms of going overseas, the company launched “Peak Speed” in Hong Kong, Macao and Taiwan in China last year, and “Egg Boy Party” was officially launched globally in February of this year. In addition, the company also continues to set up overseas first-party game studios, and some studios have also disclosed the target direction and types of products they are developing.
The profitability of the innovative business continues to improve, helping the Group's profit to develop positively. In terms of Cloud Music, it achieved first-year profit (non-IFRS net profit of RMB 820 million), and gross margin increased by 12/3ppt to 30% in 4Q23. We believe that this was mainly due to increased members' commercialization capabilities, improved copyright cost structure and revenue sharing ratio, which helped Cloud Music's overall profitability continue to grow. On the other hand, 4Q23's performance exceeded our and market expectations, and annual losses narrowed year-on-year. We believe this is mainly due to the impressive performance of digital content and online marketing services, while the deepening application of AI technology in various businesses also helps improve efficiency.
Profit forecasting and valuation
Keep profit forecasts unchanged. The current Hong Kong stock price corresponds to 15.0/12.9 times the 24/25 non-GAAP price-earnings ratio, and the US stock corresponds to 14.6/13.0 times. Maintaining an outperforming industry rating and a target price of HK$2119/$139 based on the SOTP valuation method, corresponds to 18/16 times the 24/25 non-GAAP price-earnings ratio of Hong Kong/US stocks, with an upside of 20/ 24%, respectively.
risks
The macroeconomy is sluggish, regulatory policies are becoming stricter, the game launch process or performance falls short of expectations, cost and cost investment exceeds expectations, overseas competition intensifies, and there is a risk of exchange rate changes.