Hot new products have driven a sharp increase in the company's performance, and profit margins have increased dramatically. Maintaining the “buy” rating in 2023, the company achieved operating income of 103.5 billion yuan (+7.23% year over year) and achieved net profit of 29.4 billion yuan (+44.64% year over year). Among them, revenue from games and related value-added services was $81.6 billion (+9.4% YoY); Cloud Music revenue was $7.9 billion (-12.5% YoY); Youdao's revenue was $5.4 billion (+7.7% YoY); and revenue from innovation and other businesses was $8.6 billion (+8.5% YoY). The company's gross margin was 60.95% (+6.27pct year over year), mainly due to the increase in the revenue share of games developed independently by the company and the increase in the gross margin of Cloud Music. The company's net profit margin was 28.43% (+7.35pct year over year), mainly due to increased gross margin and proper cost ratio control. With 2023Q4, the company achieved revenue of 27.1 billion yuan (+7.04% YoY, -0.48% YoY) and realized net profit of 6.6 billion yuan (YoY +66.52%, -16.01%). The year-on-year increase in Q4 performance was mainly due to the impressive performance of new games such as “Against the Cold” and “Pinnacle Express”. Based on the company's performance and expectations for the company's game flow, we raised 2024-2025 and added a profit forecast for 2026. We expect the company's net profit for 2024-2026 to be 331/364/394 (301/332) billion yuan respectively, corresponding EPS is 10.3/11.3/12.2 yuan, and PE corresponding to the current stock price is 15.5/14.1/13.0 times, respectively. We are optimistic that the launch of high-quality reserve games will continue to drive the company's performance growth and maintain the “buy” rating .
Popular games are frequent and have been monetized well over a long period of time. After the launch of high-quality reserve games, “Egg Boy Party” has accumulated 500 million registered users since its launch in 2022, and the number of daily active users exceeded 40 million during the 2024 Spring Festival. The “Against the Cold” mobile game has a total of over 100 million active users, and the 6 yuan fashion sales volume exceeded 100 million units in a single season. The company's reserve games include “Eagle” (open beta on March 28), “Eternity” (mobile game version obtained in February), and “The Sixteen Sounds of Yan Yun”, etc., which are expected to continue to drive the company's performance growth after subsequent launches.
Accelerate the implementation of AI in the game scene, or further open up space for game business growth, the “Against the Cold” mobile game is based on the underlying Fuxi AI model and pioneered the virtual newspaper system “Big Song Headline”. AI automatically generates more than 300 million stories with rich graphics based on players' interests. “Egg Boy Party” continues to upgrade the UGC creation tool equipped with AI algorithms, helping players to increase the total number of maps to over 100 million, and play a single map up to 120 million times. Enhancing the game experience and content richness through AI technology, as well as possible AI native gameplay in the future, is expected to further open up room for long-term growth in the company's business.
Risk warning: Risks such as the launch time or streaming performance of new games falling short of expectations, and declining streaming of old games.