Core views:

The company disclosed the 24Q1 results announcement. Gaming is steady, office growth has been maintained, and profitability has improved.

Revenue was +8.5% year-on-year to $2,137 million, operating profit margin was +4.8pct to 28.2% year over year, and net profit to mother increased sharply to $285 million, mainly due to a decrease in sales expenses and loss reduction in Jinshanyun.

Game: “Sword Net 3” is steady, and “White Forbidden Zone” exceeds expectations. 24Q1 revenue was -0.8% year-on-year to 912 million yuan, and “Sword Net 3” was stable overall; “Dust and White Forbidden Zone” Q1 DAU and turnover increased significantly. Up to now, it has ranked 2/4 in the iOS free/best seller list, helping the company open up a two-dimensional circuit. Reserve game: “Sword Net 3: Unbounded” has begun multiple rounds of testing. It is expected to be launched in June '24. “Unrestricted” has obtained a version number and is undergoing continuous testing and optimization.

Office: AI commercialization and membership system upgrades are expected to help ARPU and increase the number of paid users. 24Q1 revenue was +16.5% YoY to $1,225 million, and MAU was +2.2% YoY to $602 million. C-side subscription revenue +24.8% YoY to $734 million; B-side subscription revenue +13.6% YoY to $242 million (with high base impact). WPS AI began commercialization in March. The AI feature price is significantly higher than for non-AI members, 148 yuan/year for super members, 248 yuan/year for AI members, and 348 yuan/year for members (including super members and AI member benefits). Currently, the promotion period is 618. WPS 365 was launched in April, aimed at organizations and enterprises. It complements functions such as collaboration and AI on the basis of Office, and upgraded from a tool product to an office platform.

Profit forecasting and investment advice. “Sword Net 3” is predicted to grow steadily, and “Dust White Zone” and “Sword Net 3 Unbounded” will bring growth, increasing game revenue for 24 to 25 years, and predicting revenue of the game business +10%; commercialization of office AI is expected to drive an increase in ARPU and the number of paying users; cost optimization and a narrow reduction in sales expenses for 24-25 years; Jinshanyun will significantly reduce losses. It is expected that the company should account for losses of associated companies in 24-25. The forecast is that the company's revenue for 24-25 will be 10.069 billion yuan, 12.321 billion yuan, and net profit to mother will be 1,057 billion yuan and 1,418 billion yuan. Giving 24-year gaming 10 times PE, office 40 times PE, and cloud 1 times PS, corresponding to a reasonable value of HK$38.73 per share according to SOTP. Maintain a “buy” rating.

Risk warning. Old games naturally declined, new games fell short of expectations; office fell short of expectations, etc.