Core views:

Q2 performance outlook: We expect 24Q2 total revenue of 6.131 billion yuan, YOY/QoQ +16%/+8%. The 24Q2 gross margin is expected to be 29.6%, YOY+6pct, QoQ+1pct, and will continue to increase, driven by growth in advertising and gaming businesses. Among them, 24Q2 advertising is expected to increase 28% year over year, live streaming and VAS increase 15% year over year, game business increase 12% year over year, and other business decline 10% year over year. Net loss for 24Q2 is estimated at $0.668 billion. NongAap's net loss to mother is expected to be 0.34 billion yuan, a year-on-year contraction of 65% and a month-on-month contraction of 23%; the loss ratio of NonGaAAP is expected to be 6%, narrowing by 13 pcts year over year and 2 pcts from month to month.

“Three Kingdoms Decide the World” performed well after its launch in June, and should clearly boost game performance in the second half of '24 and '25. Judging from the pace of operation, after launch on June 13, according to Qimai data, the ranking remained high in the bestseller list for the first 30 days, and began to decline in mid-late July, mainly considering that the S1 season was basically completed. We saw a marked increase in sales rankings after starting the S2 season on August 2. It is expected that the game will maintain the pace of launching a new season every February, and the continuation of the future remains to be watched. Considering the game's ranking in the bestseller list after launch, our forecast for 24-25 game performance was raised to 5.3 billion yuan and 5.8 billion yuan, corresponding year-on-year increases of 33% and 9%. The upward elasticity of game products on overall game performance is quite clear.

Profit forecasting and investment suggestions: Considering the steadiness of the company's advertising performance and the upward elasticity brought about by game products exceeding expectations, it will accelerate revenue growth in 24 years, and also have a positive effect on the company's turning losses into profits. We adjusted our 24-25 revenue forecast to 27 billion yuan and 31.2 billion yuan, up 19.8% and 15.7% year over year; NongAap's net profit to mother is estimated to be -0.622 billion yuan/1.549 billion yuan. Using a per-user valuation, the company was given a reasonable value of $24.71/ADS (HK$192.56 per share), maintaining a “buy” rating.

Risk warning: Continued marketing increases, content costs expand, and user growth falls short of expectations.