23 Net profit to mother increased by 9%. Net loss to mother in 24Q1 was mainly due to a sharp increase in R&D investment
Kunlun World Wide released an annual report & quarterly report. In 2023, it achieved revenue of 4.915 billion yuan (yoy +3.78%), net profit of 1,258 million yuan (yoy +9.19%), deducted non-net profit of 660 million yuan (yoy -42.85%), and confirmed non-recurring profit and loss of 599 million yuan, mainly including 659 million yuan in income from changes in the fair value of financial assets held by Opera. 24Q1 achieved revenue of 1,208 billion yuan, yoy -0.79%; net loss to mother of 187 million yuan (23Q1 to mother of 212 million yuan), mainly due to: 1) R&D expenses increased by 178 million yuan; 2) phased loss in investment business; 3) gross margin fell 4.35 pct year on year. We expect the company to achieve net profit of 10.8/11.0/1.14 billion yuan in 24-26, target market value of 60.86 billion yuan under the segmental valuation method, corresponding to a target price of 50.09 yuan, and maintain a “buy” rating.
The gross margin declined in 24Q1, and the expense ratio fluctuated greatly during the period
The company's 2023 gross profit margin was 78.8%, which remained stable year over year. The 24Q1 gross profit margin was 78.43%, down 4.35pct. The cost rate increased by 9.74 pct to 70.87% during 2023, of which: management fee ratio was 17.52%, +4.26% pct compared to the same period, mainly due to the increase in equity incentive expenses; the R&D expense ratio was 19.69%, +5.11pct year-on-year. The cost rate for the 24Q1 period was 80.86%, yoy+15.98pct, of which the R&D cost rate was 28.87%, yoy+14.86pct, the management fee rate was 13.22%, yoy-5.48pct, the main reason was the reduction in consulting service fees and equity incentive expenses, the 24Q1 sales expense ratio 37.44%, yoy+5.30pct, mainly due to increased purchasing volume, and the 24Q1 financial expense ratio was 1.33%, yoy+1.30pct, mainly due to exchange rate fluctuations.
The company continues to increase investment in R&D and is expected to continue to strengthen the company's AI business moat.
Opera's revenue grew steadily in '23, and revenue from other businesses declined to varying degrees. The company's advertising business and search business increased by 21.2%/29.0% respectively in '23, mainly due to the strength of Opera's business, thanks to the continuous advancement of the browser commercialization strategy. In '23, Opera achieved revenue of $397 million, an increase of 20% year over year. Opera's annualized ARPU in 23Q4 was $1.44, an increase of 22% over the same period. 24Q1 Opera's revenue also increased 17%; 24Q1 Opera's global MAU reached 304 million. At the same time, thanks to the continued growth of users in high ARPU regions, 24Q1 saw an annual ARPU of 1.34 US dollars, an increase of 24%. Opera updated its 2024 performance guidelines, and revenue is expected to increase by 14.3%-17.1%.
The company's gaming/social networking (domestic) /social networking (overseas) revenue declined by 26.5%/19.9%/9.6%, respectively.
Tiangong's large model was iterated to version 3.0, and AI applications were implemented
The company's “All in AGI Strategy” continued to advance. On April 17, Kunlun Wanwei's “Tiangong 3.0” pedestal model and Tiangong SkyMusic music big model were launched, and the number of Tiangong AI search users grew rapidly in April 2024. According to Quest Mobile, as of April 14, the weekly frequency MAU of Tiangong AI assistants was 4.899 million, an increase of 45.9% from 3.358 million in early March (March 4 to March 10). According to the Iphone China “efficiency” download ranking published by point data, “Tiangong AI Search” under Kunlun World Wide ranked 10th as of April 26. The company has built AI business matrices such as AI big models, AI search, AI music, AI video, AI social networking, AI games, etc., and is looking forward to the growth of C-side users.
Risk warning: AIGC development falls short of expectations, model development progress falls short of expectations, industry policy risks.