Revenue growth accelerated, and losses narrowed sharply, turning losses into profit in a single quarter. Maintaining the 2024Q2 revenue of “buy” rating companies, achieving a gross profit margin of 29.9% (+6.8pct year over year), net loss of 0.608 billion yuan (60.7% year-on-year reduction), and adjusted net loss of 0.271 billion yuan (71.9% year-on-year reduction). The increase in performance was mainly due to a sharp increase in advertising and mobile game revenue and an increase in commercial monetization efficiency. The company's 2024Q2 operating cash flow was 1.751 billion yuan (2023Q2 was -21.2 million yuan), achieving a positive operating cash flow. We maintain our profit forecast for 2024-2026. We expect the company's net profit for 2024/2025/2026 to be -1.379/0.029/0.743 billion yuan, corresponding EPS of -3.3/0.1/1.8 yuan respectively, and the current stock price is 55.2 times PE in 2026. We are optimistic that the platform's commercialization potential will continue to be unleashed and maintain a “buy” rating.

The performance of advertising and mobile games was strong. B-side and C-side went hand in hand to increase commercial efficiency 2024Q2 value-added service revenue of 2.566 billion yuan (+11.5% year over year), mainly due to increased membership size and payment. As of 2024H1, the number of regular members was 0.243 billion yuan (+13% year over year), with payments for paid classes, fan charging plans and personalized costumes increasing year on year; 2024Q2 advertising revenue was 2.037 billion yuan (+29.5% year over year), mainly advertising Product optimization led to strong growth in performance advertising. The number of advertisers on the 2024H1 platform increased by more than 50% year over year; 2024Q2 mobile game revenue was 1.007 billion yuan (+13.1% year over year), mainly due to the “Three Masters” contributions; and 2024Q2IP derivatives and other revenue were 0.516 billion yuan (-4.2% year over year). While the platform's revenue grew, operating costs were relatively stable, driving the 2024Q2 gross margin to increase 6.8pct year-on-year to 29.9%. 2024Q2 sales expenses/management costs/R&D expenses were 1.036/0.488/0.895 billion yuan, +12.8%/-9.6%/-14.6% year-on-year. Improved commercialization efficiency led to a year-on-year reduction in adjusted net loss of 71.9% to 0.271 billion yuan.

User size, stickiness, and consumer preferences have all increased. The continuous release of community value has driven long-term growth thanks to the prosperity of the content ecosystem. As of 2024H1, DAU reached 0.1023 billion (+8% YoY), MAU was 0.339 billion (+6% YoY), the average daily usage time of active users was 102 minutes (+7.4% YoY), the 12-month membership retention rate was 80%, and the number of users with consumer behavior increased by more than 200% year over year. The average age of users is 25, and their consumer preferences for durable goods are driving the growth of advertising clients such as baby, automobiles, travel, home improvement, etc. We are optimistic that the combination of high-quality user pools and effective operating strategies will drive increased monetization efficiency, and that advertising, gaming and other businesses will blossom more, and jointly drive performance growth.

Risk warning: advertising commercialization efficiency falls short of expectations, user growth is slowing down, competition in the short video industry intensifies