Key points of investment:
The first-month turnover of “DNF Mobile Game” exceeded expectations, reaching 25 billion yuan in the first year. Combined with point-to-point data monitoring, we expect the first monthly turnover of DNF mobile games to exceed 5 billion yuan, which is better than market expectations. The DNF mobile game Hanbok was launched in March '22. The path of the Korean version is similar to the Hanbok version, but the pace is faster and the content is richer, which makes Hanbok likely have some reference significance.
Referring to the average monthly turnover of Hanbok in the first year, accounting for 42% of the first month's turnover, based on the calculation of 5 billion in the first month of National Service sales, the first year of National Service turnover reached 25.2 billion yuan. In addition to “DNF Mobile Games,” the core products “Wang Zhe” and “Peace” have been continuously verified. Among them, “Peace” had remarkable commercial tuning results, and Q2 showed even stronger performance compared to the previous year; the second half of the year was rich in products, focusing on “Dawn of the Stars”, “Need for Speed Mobile Game”, “Operation Delta”, and “Rock Kingdom: World”.
DNF Mobile Games has removed part of the Android app market, and the game's profit margin ceiling is expected to rise. According to the game's official announcement. Starting 6.20, DNF mobile games will no longer be available in some Android app stores. We believe that Tencent's core demand for the Android mobile app market is to reduce the share. Generally speaking, the Android app market share is high (50%), but under the boutique trend, the bargaining power of leading products is enhanced, and social/short video/vertical channels (relatively low channel costs) can also meet new demand very well. Therefore, we believe that the removal of the Android app market essentially means that leading products can acquire users at a lower cost from other channels. This means that in the medium term, revenue from the Android app market may be compensated by other channels, and the gaming profit margin ceiling is expected to rise further.
Others focus on video numbers and AI. 1) E-commerce is expected to take over and monetize after the video account is advertised. Video ad revenue growth is currently still driven by user traffic and has yet to reach the ceiling, and there is plenty of room for improvement in loading rates compared to similar platforms. Recently, the WeChat video account's live e-commerce structure was adjusted and merged into the WeChat open platform. It is at the same level as the public account and applet, and the strategic positioning has been improved. 2) Tencent's ingot has been upgraded, and AI is actively promoted. Yuanbao integrates the core functions of the current C-side AI assistant. Its advantage is that it can use high-quality data from public accounts and can channel public accounts; the recent new version supports processing of 10 million characters of ultra-long text. OpenAI is tightening the use of domestic APIs to benefit large domestic models. Tencent Cloud actively provides migration services, giving away 100 million free Tencent Hybrid Shengwen Tokens to newly registered enterprise users.
Raise the profit forecast and maintain the buying rating: Considering that “DNF Mobile Games” exceeded expectations and that the game's profit margin is expected to increase further in the medium term, we raised our profit forecast. Non-IFRS net profit for 24-26 is 2025/2293/258.9 billion yuan (the original forecast was 1990/2261/2510). Due to adjustments in profit forecasts, an increase in the exchange rate (HKD/RMB) and a decrease in share capital compared to the previous target price, we have fine-tuned the target price from HK$471 to HK$473, based on a 26% increase in the buying rating.
Risk warning: Changes in internet finance regulations, changes in game regulation, macroeconomic recovery falls short of expectations.