4Q23 total revenue grew 7% YoY to RMB27.1bn, -4% miss expectation. Core game delivered 12% YoY, contributed by 29% YoY solid mobile games. 25.3% OPM failed to meet consensus mainly due to increased S&M expenses amid fierce competition. We see Co. will unswervingly execute its globalisation game strategies in terms of genre innovations, geographical expansion, efficiency improvement, technology integration and talent recruitments. We expect domestic market will be the main growth engine in 2024-25 with overseas markets starting to shine from 2026 onwards. Along with strong and consistent capital return initiatives, maintain BUY and our TP of US$130.0/ HK$204.0 mainly on 15.0x FY2024E adj. EPADS.
Key Factors for Rating
Committed globalisation game vision. We see Co. will be committed to satisfy global gamers' diverse demands through gameplay innovation, content production and technology integration across game genres, terminals and geographies. We are confident on Co.'s diverse and continuous pipelines in domestic market in coming years. For overseas, Co. keeps i) patiently testing specific launched products in suitable markets ; ii) setting up global 1P studios in developed countries to work on 3A original IP; iii) recruiting global industry veterans; and iv) invest in boutique global studios. We expect new 3A titles developed by global studios will start to launch in 2026E. We cut 2024E and 2025E game revenue by 4% and 2% respectively to mainly reflect our latest assumptions on new game launch date, terminal, geography and grossing . We see Co. will continue to improve channel and cost efficiency so that we largely keep our GPM estimations unchanged despite lower revenue. We slightly nudge up our Opex assumptions in terms of S&M and R&D expenses.
4Q23: Failed to meet demanding top and bottom line expectations. Total revenue grew 7% YoY to RMB27.1bn, -4% miss consensus/ BOCIe. Core online game delivered 12% YoY to RMB19.5bn, with mobile and PC game logging 29% YoY and -23% YoY respectively. Non-game revenue (including game related VAS) dropped by 3% YoY to RMB7.6bn. GPM was relatively flattish QoQ to reach 62.0%, above consensus and in line with BOCIe. OPM was 25.3%, missing streets' expectation of 28.2% mainly due to increased S&M expenses amid fierce competition. Deferred revenue excluding Youdao was RMB12.3bn (up 7% YoY). Co. has utilised 13% (vs. 12% as of end Sep) of its 3-year US$5bn share buyback quota before Jan 2026 as of end Dec. Co. has increased its dividends payout ratio to over 75% this quarter from roughly 30% previously.
Key Risks for Rating
Downside risks: i) weak macro and online discretionary spending recovery; ii) game regulations; iii) competition; iv) destructive investments; v) dampened partnerships; and vi) ADR delisting.