Performance summary: Q2 revenue of 6.13 billion yuan, a year-on-year increase of 15.5%, slightly higher than the market's agreed expectations.
The gross profit margin was 29.9%, up 6.8 pcts year on year, mainly due to the increase in the share of high-margin advertising and game business; operating profit margin was -9.5%, narrowing by 14.6 pcts year on year. GAAP net loss of 0.61 billion yuan; non-GAAP net loss of 0.27 billion yuan, a year-on-year narrowing of 71.8%, slightly higher than the market's agreed loss of 0.33 billion yuan. The company guides Q3 to achieve profit from non-GAAP operating profits. The market expects Q3 revenue to increase 22.4% year over year to 7.1 billion yuan, and gross margin to increase by 5.1 pcts month on month to 35%.
The advertising business benefits from game+e-commerce investment, and annual advertising revenue is expected to increase 24% year on year: Q2 advertising revenue increased 29.5% year over year to 2.04 billion yuan, thanks to increased advertising demand in summer e-commerce, games, education and training categories. The number of advertisers increased 50% year over year in the first half of the year, and performance advertising revenue increased 50% year over year. The ad atload is expected to reach 6% this year, and future increases in the number of advertisers and the launch of a fully managed ad delivery model are expected to drive an increase in advertising eCPM. Q2 Value-added service revenue increased 11.5% year-on-year to 2.57 billion yuan, and the gross margin for live streaming in the first half of the year was around 25%. The Q3 advertising business is expected to benefit from increased demand for games and 3C digital and maintain double-digit year-on-year growth. We expect annual advertising revenue to grow 24.2% year over year to 7.96 billion yuan.
The number of users grew steadily, and the cost rate continued to improve: Q2 company's DAU increased 5.2% year over year to 0.1 billion; MAU increased 3.7% year over year to 0.34 billion; official members increased 13.6% year over year to 0.24 billion, of which paid members increased 9.0% year over year to 22.3 million; and the average daily usage time of a single user was 99 minutes.
This quarter's gross margin increased 6.8/1.6 pcts year over month, administrative/R&D expenses decreased by 9.6%/14.6% year on year, respectively, and marketing expenses increased 12.8% year over year due to “Three Mou” investment.
“Three Tricks” entered the new season, and Q2 game deferred revenue increased by 0.74 billion yuan month-on-month: Q2 game revenue was 1.01 billion yuan, up 13.1% year over year. Deferred game revenue increased by 0.74 billion yuan month-on-month this quarter, and “Sanmoku” remained in the top 20 iOS bestsellers. We expect the annual turnover of 2024 to be 2.5 billion yuan. According to the agency game share ratio, the company can receive 70% of game revenue. Referring to the long-term sales situation of SLG games, it is estimated that the annual sales volume of “Sanmou” will be 5 billion yuan in 2025, contributing 3.5 billion yuan to the company's revenue.
Target price: $21.00/HK$163.77, purchase rating: The company expects revenue of $26.7/29.5/31.3 billion for 2024-2026, and a three-year CAGR of 17.8%. Net profit to mother - 1.3/0.3/1.6 billion yuan, net profit margin was -4.9%/1%/5%. Considering the increase in the company's gross margin, the target price for 2024 was US$21.00/HK$163.77 using the distributed valuation method. Compared with the current stock price, there is still room for growth of 36.61%/35.01%, giving it a buy rating.
Investment risks: User traffic growth falls short; commercialization falls short of expectations; game performance falls short of expectations.