Game sales contracted in the first quarter. Revenue was lower than expected but profit was better than expected: total revenue for the first quarter of 2024 was 2.14 billion yuan (RMB, same below), up 8% year on year, and 4% lower than our expectations. Game/WPS revenue was -1%/+17% year over year to 91 billion yuan/1.23 billion yuan, respectively. Game revenue fell 11% month-on-month, mainly due to a decrease in the operating activities of old games. WPS revenue growth was mainly driven by subscription revenue growth. Adjusted operating profit increased 27% year over year to 678 million yuan, 8% higher than our expectations, mainly due to a contraction in game sales expenses.

Highlights of the first quarter results: The game business was stable year over year. Among them, “Sword Net 3” performed steadily, and the popularity and turnover of “Dust and White Forbidden Zone” increased month-on-month. WPS's revenue growth in the first quarter was mainly driven by growth in individual subscriptions and institutional subscriptions, which increased 25%/14% year over year, respectively. The licensing business of mainland institutions recovered from a decline to 6% year over year, and advertising fell 18% year on year due to business contraction.

Outlook: The “Swordnet 3 Unbounded” mobile game is expected to be launched in June 2024, and will be connected to all platforms of the “SwordNet 3” mobile game. After the launch of the new version of “Dust White” in mid-April, there was a marked increase in sales. Coupled with PC and overseas revenue, sales are expected to reach 1-2 billion yuan in the next 30 days. We estimate that “Dust White Forbidden Zone” contributed ~ 15% to game revenue in the second quarter. Game revenue is expected to increase by 12% in 2024 (compared to 9% previously). “Unblock” received the version number in March, and is currently undergoing testing and optimization in the Mainland and overseas.

The WPS AI office platform begins commercialization. In April 2024, WPS released WPS 365, a new productivity office platform for enterprises and organizations, including WPS Office, WPS AI Enterprise Edition, and WPS Writing, which opens up the three major capabilities of documents, AI, and collaboration, and enables users to use various mainstream models on the same interface and seamlessly switch various components to achieve efficient work. Currently, the price of subscription services that include AI functions is about 1 times higher than the price of traditional membership subscriptions. Commercialization of AI is expected to drive up the customer unit price and payment rate of WPS individual subscriptions and institutional subscription revenue.

valuation. We have fine-tuned our revenue forecast and raised our 2024 net profit forecast by 4%. Based on game revenue returning to double digit growth, we raised the target price from HK$26 to HK$30, including the game's 2024 price-earnings ratio of 13 times (previously 10 times)/unchanged WPS 25 times (all based on 1 times PEG). “Dust and White Zone” will significantly drive game revenue growth in the 2nd quarter. Plus, the new game launch is imminent.