We forecast a 10.8% year-on-year increase in 1Q24 revenue, and a non-GAAP net loss of 605 million yuan, or release 1Q24 results in mid-late May. We expect the company's 1Q24 revenue to increase 10.8% to 5.617 billion yuan. Bloomberg's agreed forecast was 5.606 billion yuan; non-GAAP operating loss was 614 million yuan; non-GAAP net loss was 605 million yuan, and Bloomberg's agreed loss was 494 million yuan.
Key points of interest
Ad revenue is growing healthily, and attention is being paid to the subsequent progress of key games. Advertisement: During the 1Q24 Spring Festival, we expect more game activities and updates, which may drive a year-on-year increase in the company's advertising revenue. We expect 1Q24 advertising revenue to increase 28% to $1,628 billion. Gaming: We expect the game business revenue to drop 11% to 1.09 billion yuan in 1Q24. Looking ahead to 2Q24 and beyond, the company's reserve products are progressing positively. SLG's “Three Kingdoms: Designing the World” plans to conduct the last paid file deletion test before launch from April 17 to May 2. This test will add a vertical screen mode, AI sandbox playback system, etc. We recommend paying attention to product test feedback and launch arrangements; Guofeng Chess “Wu Hua Xin” is scheduled to go live on April 19; Q2 “Blazing Sky” is also planning to launch in the middle of the year. We expect 1Q24 revenue from value-added services to increase 16% to 2,496 billion yuan, of which live streaming business revenue may grow 21% year over year, due to relatively manageable live streaming business incentives or a positive contribution to gross margin; IP derivatives and other revenue will also drop 5% to 484 million yuan.
Reduce costs and increase efficiency or make steady progress towards the 3Q24 loss goal. We expect 1Q24 gross margin to increase by 1.1 ppt to 27.2%; the company's cost reduction and efficiency strategy continues to be implemented. We expect 1Q24 sales/management/R&D expenses to decrease by 1.0/1.2/2.8ppt to 16.4%/10.1%/17.5%, respectively. We believe that the company's cost reduction and efficiency plan is progressing clearly and in an orderly manner, and that non-GAAP operating profit may be corrected in 3q24.
Current view: Focus on the elasticity of key game products and the room for ad revenue growth under a loss reduction strategy. We believe that the company's 2024 loss reduction strategy may be reflected in cost and operating expenses control (improved labor efficiency and fixed cost control) and increased advertising revenue driven by an increase in gross margin, that is, entering a period of profit improvement brought about by operating leverage. We believe that in the short term, the market is concerned about the flexibility of the proxy game product “Three Kingdoms: Determining the World”, while in the medium to long term, advertising revenue growth expectations are critical. If user consumption capacity continues to be verified and advertising inventory is effectively released, there is still plenty of room for development in performance advertising. If growth exceeds expectations, it is expected to drive the company's valuation and performance repair.
Profit forecasting and valuation
The profit forecast for 2024/2025 remains unchanged. Maintain outperforming industry ratings and the SOTP valuation method, and maintain the target price of HK$101/13 for Hong Kong stocks and US stocks, corresponding to 1.5/1.3 times and 1.5/1.2 times 2024/2025 P/S, respectively. The upward space for Hong Kong stocks and US stocks is 9.9%/15.5%. Currently, Hong Kong stocks and US stocks correspond to 1.3/1.1 times and 1.3/1.0 times 2024/2025 P/S, respectively.
risks
The growth of the advertising business fell short of expectations, game traffic fell short of expectations, and the cost reduction and efficiency process fell short of expectations.