Results for the 1st quarter of 2024: Total revenue of 159.5 billion yuan (RMB, same below), up 6%/3% year over month, in line with our /Bloomberg market expectations. Among them, gaming remained flat, social networking -2%, financial enterprise service +7% /advertising +26%. Gross margin/adjusted operating margin of 53%/37%, optimized month-on-month, adjusted net profit of 50.3 billion yuan, up 54% year over year, significantly faster than revenue growth, thanks to the increase in revenue share of high-margin businesses such as video accounts, WeChat search ads, and mini games, as well as cost optimization for long video and cloud business. Adjusted earnings per share were 5.26 yuan, +57% year over year, exceeding our/market expectations by 17%/18%.
Key operating points for the first quarter: 1) Social network revenue fell 2% year-on-year, mainly due to adjustments in live streaming services, but was partially offset by increased revenue from live video channels, music/long video payments, and small games. The total number of minigame plays+ads increased 30% year over year. 2) Game revenue remained flat year on year. Among them, local game revenue fell 2%, but turnover showed a recovery trend, with a year-on-year increase of 3%. “Wang Zhe Rongyao” and “Peace Elite” resumed positive growth in March. Overseas game turnover/revenue increased 34%/3%, benefiting from the recovery of Supercell games and “PUBG MOBILE.” 3) Revenue from advertising increased 26% year over year, driven by video accounts, applets, search, etc., and all industries except automobiles showed positive growth. Video ad revenue increased 100% + year over year, and the closed-loop effect of mini-games led to a 40% + increase in applet revenue. 4) Fintech's year-on-year single-digit growth rate, due to the slowdown in offline consumption; corporate services maintained a double-digit growth rate, and video account merchant technical service fee contributions and cloud service revenue grew steadily.
Outlook for the 2nd quarter of 2024: Considering the launch of new local games, such as “Dungeons and Warriors” (May 21), “Wang Zhe Rongyao” and many other old games have resumed growth, while referring to deferred revenue of +23% month-on-month in the first quarter, game revenue growth is expected to accelerate. Video accounts will benefit from the establishment of a business/user ecosystem and further enhance monetization. We expect revenue to increase 7% to 159.9 billion yuan in the second quarter, advertising by 16% to 29 billion yuan, games by 4%, and corporate services by 16%. Gross profit is expected to increase by 17%, continuing to be driven by an increase in the share of revenue from high-margin businesses. Management guided the annual growth rate of 10% + in promotion expenses, which is still lower than the gross profit growth rate. The annual profit growth rate is faster than the expected revenue trend.
Valuation: We expect revenue growth of 8.2%/7.8% in 2024/25, increase gross profit forecast 7%/6%, increase adjusted net profit forecast 6%/7%, and increase the SOTP target price to HK$457 (previously HK$395) based on 20 times price-earnings ratio for core profit business and 2x market-sales ratio for cloud business, corresponding to 20/18 times price-earnings ratio in 2024/25, to maintain purchases.