Incident: Perfect World announced its results for the first quarter of 2024 on April 26. The company achieved revenue of 1,329 billion yuan in 24Q1, a year-on-year decrease of 30.19%, and a year-on-year decrease of 16.68%; achieved a net loss of 29.76 million yuan, which turned profit to mother into a loss (23Q1 realized net profit of 241 million yuan), and the company's net profit to mother was lower than previously expected; realized deducted non-net loss of 158 million yuan from year on year (23Q1 realized deduction of non-net profit of 204 million yuan).

Due to product cycle and personnel optimization, the company's Q1 profit fell short of expectations. The company's 24Q1 revenue fell 30.19% year on year, achieving a net loss of 0.30 million yuan. We believe it was mainly due to (1) the company's main mobile games, such as “Tower of Magic” and “Dream New Immortals”, which naturally declined in recharge flow due to the impact of the product life cycle, which was partially offset by the increase in “Tianlong Eight Part 2”; the game business achieved revenue of 1,285 million yuan, a year-on-year decrease of 4.90%; achieved a net loss of 115 million yuan and a year-on-year profit conversion of loss; (2) the company embraced market changes and gathered market changes and gathered to gather market changes Focus on long-term development and promote decline This efficiency increase increased resource investment in key projects, and continuous optimization of the talent pool according to strategic planning and project conditions. The costs associated with personnel optimization had a phased impact on the performance of the reporting period; of these, 24Q1 company achieved management expenses of 259 million yuan, an increase of 38%/43%, respectively. Looking backwards, we believe that after new products are launched one after another and the impact of personnel optimization is removed, the company is expected to see a recovery in revenue and profit.

The major product cycle has arrived, and various game reserves are expected to be launched one after another. 2024 is the company's product year. The company's “One Punch Man: World” and “Persona: The Phantom of the Night” have been launched in various overseas regions and domestically, respectively. Among them, “Persona: The Phantom of the Night” ranked an average of 15 on the iOS game bestseller list in the first week after launch, reaching the highest number 8. In addition, “Zhimian 2” began large-scale testing on April 23, and user feedback was good; the “Zhimen World” project team announced a detailed “tuning plan”, which is currently being actively optimized; and “Light Ink Shui Yunxiang” announced that it will begin a billing file deletion test on May 7. Overall, the company has begun a major product cycle, and revenue and profits are expected to improve sequentially from 24Q2.

Investment advice: We expect the company to achieve revenue of 89.91/102.28/11.398 billion yuan in 2024-2026; net profit to mother of 10.65/11.92/1,403 billion yuan; corresponding PE of 18.2/16.2/13.8 times, respectively. The company's 24-year heavy cycle is approaching, management efficiency continues to improve, and the “buy” rating is maintained.

Risk warning: Product flow falls short of expectations; launch progress falls short of expectations; economic recovery falls short of expectations; industry policy changes.