The company's performance has grown steadily, profitability continues to improve, and maintains a “buy” rating
With 2024Q1, the company achieved operating income of 26.9 billion yuan (+7.2% YoY, -1.1% YoY) and realized net profit of 7.6 billion yuan (YoY +13.0%, +16.0%). Among them, revenue from games and related value-added services was $21.5 billion (+7.0% YoY); Youdao's revenue was $1.4 billion (+19.7% YoY); Cloud Music revenue was $2 billion (+3.6% YoY); and revenue from innovation and other businesses was $2 billion (+6.1% YoY). The company's gross margin was 63.37% (+3.89pct year-on-year, +1.38pct month-on-month), mainly due to the increase in the revenue share of games developed independently by the company and the increase in the gross margin of Cloud Music. The company's net profit margin was 28.43% (+1.46pct year over year, +4.18pct month-on-month), mainly due to increased gross margin and proper cost ratio control. We maintain our profit forecast for 2024-2026. We expect that the company's net profit for 2024-2026 will be 339/373/404 billion yuan, the corresponding EPS will be 10.5/11.6/12.6 yuan, and the PE corresponding to the current stock price is 12.4/11.3/10.4 times, respectively. We are optimistic that the launch of high-quality reserve games will continue to drive the company's performance growth and maintain the “buy” rating.
Long-term operating quality revenue reached a record high, accelerating the full-platform and global distribution of new products
2024Q1, the “Journey to the West” mobile game recorded a record high in revenue; popular games such as “Against the Cold” mobile game and “Egg Boy Party” remained at the top of the bestseller list. “The Fifth Personality” 2024Q1 revenue and May DAU reached record highs. “Tsuchigahama” 2024Q1 revenue hit a three-year high. The new game “Out of the World” was launched in January and reached the top of the iOS download list in March and May; “All Star Street Ball Party” and “Peak Speed” entered the Hong Kong, Macao and Taiwan markets in China, and topped the download lists and bestsellers in many places. In the second half of 2024, the company will accelerate the pace of full-platform and global distribution of self-developed new products. The national service for the open world game “The Sixteen Voices of Yan Yun” is scheduled to be the first public beta on July 26th. The popularity of the mobile game “Eternity” has risen rapidly, and the number of online reservations has exceeded 30 million. “Seven Day World” made it to the top ten on Steam's global wish list with its excellent quality. In April, the company upgraded its partnership with Microsoft Games and renewed its distribution agreement with Blizzard Entertainment. Blizzard's first return game will launch in the summer of 2024.
Maintaining high R&D investment, the AI model helped increase efficiency and quality in the four major industries of education and entertainment until 2024Q1. The company's R&D investment intensity exceeded 15% for 7 consecutive quarters. The AI model is deeply integrated into the four major industries of games, education, music, and industry. The implementation of AI in game, music and other content production, education, marketing, etc. may continue to reduce costs and increase efficiency, and is expected to further open up space for the company's growth.
Risk warning: Risks such as the launch time or streaming performance of new games falling short of expectations, and declining streaming of old games.