23Q4 revenue was 27.140 billion yuan (yoy +7.0%, qoq -0.5%). The month-on-month decline was mainly due to a decrease in game revenue, and the year-on-year increase was mainly brought about by “Against the Cold” and the like. The Q4 gross profit margin was 62.0% (yoy+9.8pp, qoq-0.2pp). The year-on-year increase was mainly brought about by game growth. Q4 Contract liabilities were $13.36 billion (difference from prior period — $830 million). Sales expenses of 4.23 billion (yoy +23.6%, qoq +18.5%); management expenses of 1.25 billion (yoy -3.9%, qoq -16.2%); R&D expenses of 4.48 billion (yoy +9.5%, qoq +3.0%). Non-GAAP net profit of 7.4 billion (yoy +53.4%, qoq -14.6%). GAAP net profit of 6.58 billion (yoy +66.5%, qoq -16.0%).
The total revenue of 23Q4 games and related value-added services was 20.92 billion yuan (yoy +9.6%, qoq -3.9%). The year-on-year increase was mainly due to the outstanding performance of the new game “Peak Speed” in the Hong Kong, Macao and Taiwan markets, and online games such as “Against the Cold” and “Egg Party” continued to launch innovative content to achieve net revenue growth. The gross profit margin for games and related value-added services is 69.5% (yoy+10.4pp, qoq+0.5pp). Among them, mobile game revenue was 14.99 billion (yoy +28.8%, qoq -5.4%), and mobile game revenue was 4.553 billion (yoy -22.7%, qoq -0.4%). The product reserves are abundant. “Conjuring” is expected to be launched in March 2024, and 2024Q2 anticipates that the launch of “Everlasting Mobile Game” and “Operation Apocalypse” is expected to increase revenue. “The Sixteen Voices of Yan Yun” has also received an edition number.
23Q4 Cloud Music's revenue was 1.99 billion (yoy -16.4%, qoq +0.7%), mainly for social entertainment services, adopting a more prudent business strategy. Cloud Music's gross profit margin is 30.3% (yoy+12.5pp, qoq+3.1pp), and profitability continues to increase, mainly due to the increase in membership subscription revenue brought about by expanding the number of users and optimizing product quality, as well as the continuous improvement of cost control measures.
23Q4 had revenue of 1.48 billion (yoy +1.9%, QoQ -3.7%). The gross profit margin was 49.9% (yoy-3.4pp, qoq-6.0pp). The month-on-month decline in gross margin was mainly due to a decrease in learning service revenue. The year-on-year decline was mainly due to a short-term decline in net revenue from smart devices due to optimized sales channels.
The company's new tours “The Eagle”, “Eternity”, “Operation Apocalypse”, “16 Voices of Yan Yun”, and “Mission Zero” have received editions and are expected to be launched one after another to drive growth. We forecast the company's net profit for 23/24/25 to be 294/333/37.2 billion yuan (original value was 302/328.39.2 billion yuan, adjusted profit forecast due to adjustments to the pace of game launches). We used SOTP valuation and gave a target price of 151.79 RMB/HK$167.92 (HKD/CNY=0.9), maintaining a “buy” rating.
Risk warning
New game performance falls short of expectations; version approval uncertainty; game net interest rate fluctuates; competition for live streaming intensifies