Event: Company announcement 2 023Q4 and full year results. In 2023, we achieved revenue of 103.468 billion yuan, YoY +7.23%, net profit attributable to mother of 29.417 billion yuan, YoY +44.64%; realized non-GAAP net profit of 32.688 billion yuan, YoY +42.97%. 2023Q4 achieved revenue of 27.140 billion yuan, YoY +7.04%, QoQ -0.48%, net profit to mother of 6.582 billion yuan, YoY +66.52%, QoQ -16.01%, and non-GAAP net profit of 7.379 billion yuan, YoY +53.38%, and QoQ -14.64%.
Self-developed new products have achieved historic breakthroughs, and many leading products are expected to gradually be launched. 2023Q4 online games achieved revenue of 19.541 billion yuan, +11.5% year-on-year, of which mobile games/mobile games achieved revenue of 149.88/4.553 billion yuan respectively, or +28.8%/-22.7% year-on-year. The company continues to consolidate the advantages of casual parties, MMOs and other tracks, and expand the influence of self-developed products on the public. Among them, “Egg Boy Party” has over 40 million daily active users, 500 million registered users, and 100 million maps, ranking first among party games, leading the company to achieve a breakthrough on the game DAU circuit. “Against the Cold” attracted over 100 million active users. On the other hand, “Pinnacle Speed”, “All Star Street Ball Party”, and “Out of the World” all performed well in racing, basketball, and otome tracks. We believe that the company's ability to expand the game category has been gradually verified, and we are optimistic about the long-term development of its game business and leading position in the market segment. Furthermore, thanks to the optimization of the channel structure and the increase in the share of self-developed game revenue, the gross margin of the game business was +0.5pct month-on-month to 69.5%. In terms of product reserves, “Eagle” (scheduled for March 28, over 10 million pre-orders), “Yanyun's Sixteen Sounds”, “Mission Zero”, and “Eternity Mobile Game” (to be tested for the first time on April 1) have all received edition numbers and are expected to be launched one after another in 2024.
Cloud Music further strengthened the commercialization of members, and the implementation of the “Ziyue” model exceeded expectations. Cloud Music continues to strengthen its music-centered business monetization capabilities. Q4 achieved revenue of 1,986 billion yuan, -16.4% year-on-year, turning a loss into a profit for the first time. A one-stop AI music creation tool developed by its AI Music Lab, which can generate song demos in 10 seconds based on 3 keywords. On the business side, the implementation of the “Ziyue” Education Model 2.0 exceeded expectations, driving Q4's net operating cash inflow to a record high, achieving revenue of 1,481 billion yuan, or +1.83% over the same period last year.
The business revenue structure continued to improve, and overall gross margin remained stable. 2023Q4's gross margin was -0.2pct to 62% month-on-month, and overall remained stable. Among them, the gross margin of Cloud Music and Innovation Business improved by +3.1/+7.1 pct to/ 30.3%/34.4%, respectively, and the gross margin of games increased by +0.5 pct to 69.5% month-on-month, mainly due to an increase in the share of games developed independently. Yudao's gross margin was -6.0 pct to 49.9% month-on-month, mainly due to a decrease in revenue contributions from learning services and a decline in smart hardware gross margin.
Investment advice: We expect the company to achieve revenue of 1157.02/1280.98/141,141 billion yuan and non-GAAP net profit of 370.36/414.74/46.350 billion yuan in 2024-2026, maintaining the “buy” rating.
Risk warning: Industry regulations are getting stricter, and product launches fall short of expectations.