Key points of investment

Incident: 2024Q1 achieved operating income of 2.137 billion yuan, yoy +8.45%, qoq -7.50%, net profit to mother of 285 million yuan, yoy +47.95%, and qoq +38.52%. The performance was basically in line with our previous expectations.

Cost optimization is compounded by joint ventures to reduce losses, and the profit side is steadily released. 2024Q1 achieved net profit of 285 million yuan, yoy +47.95%, qoq +38.52%, a significant year-on-month increase. We think the main factors are: 1) game promotion expenses decreased by 25.59% and 30.73% month-on-month to 261 million yuan, and the sales expenses ratio was 12.23% (yoy-5.59pct, qoq-4.10pct); 2) Joint venture losses continued to narrow, and 2024Q1's share of the associated company's loss was 169 million yuan. 2024Q1 2023Q1 and 2023Q4 were 231 million yuan and 286 million yuan respectively. We are optimistic that the company's operating efficiency will continue to improve. Joint venture losses are expected to narrow further, and profits are expected to continue to be released.

Game business: “Dusty White Forbidden Zone” sales are picking up, new game reserves are abundant, and revenue guidelines have been revised. In 2024Q1, the company's online gaming and other revenue was 912 million yuan (yoy -0.78%, qoq -11.02%), accounting for 42.66% of revenue. The month-on-month decline was mainly due to a natural decline in sales from old travelers, which was partially offset by a recovery in “The Dust White Forbidden Zone”. The daily activity and turnover of 2024Q1's two-dimensional shooter game “Dust and White” have rebounded markedly, and 24Q2 sales continued the upward trend, achieving the company's breakthrough on the two-dimensional circuit. At the same time, the company's strong recovery in turnover drove the company to guide the year-on-year growth rate of game revenue in 2024 to around 10%. In addition, the company's core IP mobile game “Sword Net 3 Unbounded” will be launched in June 2024, and the full platform of “Sword Net 3” will be launched. We look forward to the performance of new users and the return of old users. The sci-fi mecha game “Limiter” also received a version number in March 2024. We continue to monitor its testing, optimization and launch progress, and expect the new games to be launched one after another to drive steady revenue growth.

Office business: Continuously optimize the user experience, and expect AI to increase customer unit prices and payment rates. In 2024Q1, the company's office software and service revenue was 1,225 million yuan (yoy +16.52%, qoq -4.69%), accounting for 57.34% of revenue. The year-on-year increase was mainly due to growth in personal office subscription business, institutional subscription business, and institutional licensing business, which was partially offset by a decline in advertising business. On the AI side, in April 2024, the company released WPS365, a new productivity platform for enterprises and organizations, including WPSOffice, WPS AI Enterprise Edition, and WPS Writing, which opens up the three capabilities of documents, AI, and collaboration, and WPS AI has begun paid grayscale testing. We are optimistic that the launch of WPS365 will promote the transformation of institutional subscription models and increase C-side user stickiness and payment conversion, thereby driving the growth of institutional subscriptions and personal subscription businesses.

Profit forecast and investment rating: Taking into account the higher-than-expected turnover performance of the “Dust White Ban Zone”, we slightly raised our profit forecast. We expect EPS for 2024-2026 to be 0.86/0.97/1.19 yuan, respectively (previously, 0.84/0.96/1.19 yuan), corresponding to the current stock price PE 28/24/20 times, respectively. We are optimistic that the company's game business will continue to grow steadily, the long-term growth space for office business and AI, and maintain a “buy” rating.

Risk warning: New tours fall short of expectations, industry supervision, office business progress falls short of expected risks