The company announced its results for the first quarter of 2024, achieving revenue of 5.665 billion yuan, a year-on-year increase of 12%, an adjusted net loss of RMB 456 million, a year-on-year narrowing of 56%, gross profit of RMB 1,605 billion, an increase of 45%, a gross profit margin of 28.3%, an increase of 6.5 pct year-on-year, and an increase of 2.2 pct over the previous year.

Quarterly losses gradually narrowed, and loss reversal progressed steadily. The company announced its results for the first quarter of 2024, achieving revenue of 5.665 billion yuan, an adjusted net loss of RMB 456 million, narrowing 56% year on year, gross profit of RMB 1,605 billion, up 45% year on year, gross profit margin of 28.3%, up 6.5 pct year on year, up 2.2 pct month on month, and increasing month on month for seven consecutive quarters. Operating expenses were 2.4 billion yuan, a decrease of 2% year on year, and operating cash inflow of 638 million yuan was achieved, which was corrected year on year, and positive cash inflow was achieved for three consecutive quarters. The company's performance correction continues to advance steadily, and it is expected to achieve a break-even balance on the operating profit side in the second half of the year.

Ad revenue continues to be impressive, and the game business is expected to see marginal improvements.

1) In the first quarter, the company achieved value-added service business revenue of 2,529 billion yuan, an increase of 17% over the previous year, and both live streaming and value-added service businesses grew;

2) Advertising revenue in the first quarter was 1,669 billion yuan, an increase of 31% over the previous year. Under the optimization of the company's advertising products, advertising efficiency continued to improve, and the advertising business performed well. In January '24, the company released a marketing plan for four major scenarios, including “new product launch, rejuvenation, transaction transformation, and large nodes”, which promote the penetration and integration of search scenarios, which is expected to drive continuous rapid growth in advertising revenue;

3) Mobile game business revenue in the first quarter was 983 million yuan, down 13% from the previous year. The revenue of some old games declined. “Three Kingdoms: Designing the World”, “Blazing Sky”, and “Firefly New” have received editions in game reserves this year. Among them, the SLG themed game “Three Kingdoms: Seek the World” has been scheduled to be officially launched on June 13, and is expected to contribute to the increase starting in Q2;

4) Revenue from IP derivatives and other businesses in the first quarter was 484 million yuan, a year-on-year decrease of 5%.

The community's ecology is healthy and prosperous, and it is expected to benefit from AI knowledge payments and marketing campaigns. In Q1 '24, daily active users on Station B increased 9% year on year, reaching 102.4 million, monthly active users increased 8% year on year to 341.5 million. The DAU/MAU ratio remained at 30%. The average daily time for a single user reached a record high of 105 minutes, and the average number of video views per day was 5 billion times, an increase of 22% year over year. More than 1.5 million UP mainly received revenue from Station B. In the past year, breakthroughs in technology hotspots such as AIGC sparked lively discussions on Station B, driving the average daily broadcast volume of over 100,000 manuscripts in the Knowledge Zone to increase 60% year over year, AI category video content playback volume increased by 81% year on year, and the rapid iteration of AI applications has led to the birth of a number of popular videos with over one million views, covering fields such as popular science information, AI technology applications, digital people and creative applications, making Station B one of the most intelligent AI content communities in China. Station B's unique healthy community atmosphere provides a gathering place for general knowledge content, and also provides a natural marketing scenario for AI applications and related advertisers. As major models and AI applications at home and abroad continue to be updated, it is expected that it will continue to benefit from the increase in advertising brought about by the development of AIGC technology, and its rich video material reserves are also expected to usher in further monetization.

Maintain an “overweight” investment rating. The company's community ecology is healthy, and the number of user hours is increasing steadily. A number of proxy games are expected to be launched in 2024, which is expected to contribute to performance growth; in terms of advertising, the company released four major scenario marketing plans, including “new product release, rejuvenation, transaction conversion, and big nodes”, and also stated that it will focus on penetrating more high-traffic scenarios such as dynamics and hot searches, which is expected to further drive revenue growth. In the long run, it is also expected to benefit from the growth in the AI-related knowledge payment market and the increase in marketing budgets related to AI applications; the company stated at the performance meeting that non-GAAP operating profit is expected to be in the 3rd quarter of '24 The break-even balance has been achieved, and the loss correction progress is more clear. It is recommended to continue to monitor the company's game product launch pace and loss reversal progress.

We expect the company's revenue to reach 257, 288, and 31.2 billion yuan in 2024-2026, and adjusted net profit to mother - 7.0, 5.9 billion yuan, 1.23 billion yuan, maintaining the “increase in holdings” rating.

Risk warning: User growth falls short of expectations, industry regulation risk, mainstream UP risk loss, and increased competition risk.