Revenue was in line with expectations, and losses continued to narrow: the company's 2Q24 revenue was RMB 6.12 billion, up 16% year on year, basically in line with market expectations; adjusted net loss was 0.27 billion yuan, better than the market's expected loss of 0.33 billion yuan, which narrowed 72% year over year, and the adjusted loss rate reached 4.4%.
The advertising performance was impressive, and new games boosted the recovery of games: overall user traffic remained steady. In 2Q24, the number of daily active users increased 6% year over year to 0.102 billion, the number of monthly active users was 0.336 billion, up 4% year on year, and video playback volume increased 18% year on year. The advertising business maintained a strong growth momentum, with a year-on-year increase of 30%, and continued to outperform the market, mainly due to increased traffic and the gradual release of user commercial value.
The company will continue to deepen vertical industries such as online services, education, etc. We expect advertising revenue to increase 28% year over year in the third quarter. In terms of games, driven by the popular new game “Three Kingdoms: Determining the World”, game revenue in the second quarter was 1.01 billion yuan, up 13% year over year, reversing the downward trend. Since “Three Kingdoms: Designing the World” went live on June 13, it contributed even more significantly to the third quarter turnover. Since its launch, the game has remained in the top 10 bestsellers for most of the time, and we expect game revenue to increase by nearly 60% year over year in the third quarter. Driven by gaming and advertising revenue, the company is expected to be profitable in the third quarter as planned.
Gross margin continues to improve, and losses are expected to be reversed in the third quarter: 2Q24, the company's gross margin was 29.9%, up 6.8 and 1.6 percentage points year over month, respectively, mainly due to continued optimization of the company's revenue structure. As the share of high-margin advertising and game business revenue continues to rise, we expect gross margin to continue to improve to 34% month-on-month in the third quarter, driving the adjusted operating profit correction.
Maintain the “Buy” rating and adjust the target price to HK$15.8/HK$123: We adjusted our 2024E/2025E revenue forecast to 26.2 billion/28 billion. Taking into account recent changes in industry valuation, the target price was adjusted to HK$15.8/123, corresponding to 2024E 1.8x P/S, maintaining the “Buy” rating.
Investment risks: Industry competition intensifies; user growth falls short of expectations; profit margins fall short of expectations.