Incident: Zhejiang Digital Culture released its 2024 three-quarter report. During the reporting period, it achieved total operating income of 2.169 billion yuan, a year-on-year decrease of 5.2%, net profit to mother 0.475 billion, a year-on-year decrease of 31.38%, and net profit after deduction of 0.321 billion yuan, a year-on-year decrease of 46.85%. Q3 achieved total revenue of 0.756 billion yuan in a single quarter, up 26.27% year on year, net profit to mother of 0.327 billion, up 451.29% year on year, and net profit after deducting 0.119 billion yuan, up 6.89% year on year. Net cash flow from operating activities in the single quarter was -0.086 billion, and the total for the first three quarters was -0.182 billion.

Changes in investment income and fair value led to a high increase in profits in a single quarter. The company's net investment income for the 2024Q3 single quarter was 0.168 billion yuan. The main contribution came from Park Ying Guoshi (Shanghai) Equity Investment Fund Partnership (Limited Partnership), which participated in the investment, indirectly participated in Wireless Media (301551.SZ). Wireless Media was listed on the Shenzhen Stock Exchange Venture Board on September 26, 2024. Changes in the fair value of wireless media stocks affected the investment income confirmed under the Company's Equity Law was about 140.94 million yuan; income from fair value changes was 0.048 billion yuan per quarter This is mainly due to the fact that the company holds shares in Haijian shares, and the stock price has risen a lot this season.

Earnings from the main business are relatively stable. The company's main business remained relatively stable. The non-return profit for the Q3 quarter was 0.119 billion yuan, down 9.5% month-on-month from Q2, but up 6.9% year-on-year.

Expense ratios have narrowed markedly, and gross margins have declined. The company's gross profit in Q3 was 53.9%, down 8.2 percentage points from Q2. Costs rose significantly. We expect it to be mainly affected by the increase in advertising revenue share. The total sales expenses, management expenses, R&D expenses, and financial expenses for a single quarter in Q3 was 0.271 billion. The comprehensive cost ratio was 35.9%, down 10.8 percentage points from the same period last year. The Q3 sales expenses ratio was 9.5%, down 0.9 percentage points from the same period last year.

Profit forecast and valuation: Since the Q3 investment income performance slightly exceeded expectations, we raised the company's profit forecast appropriately. The company's revenue for 2024-2026 is 3.084 billion (previously 3.085 billion), 3.333 billion (previously 3.333 billion), and 3.6 billion (previously 3.6 billion), respectively, up 0%, 8%, and 8% year-on-year increase, and net profit to mother is 0.521 billion (originally 0.461 billion) billion), 0.605 billion (previously 0.599 billion), and 0.708 billion (previously 0.729 billion), year-on-year increases of -21%, 16%, and 17%. The current market value corresponding to 2024-2026 PE is 26.4x, 22.7x, 19.4x, maintaining a “buy” rating.

Risk warning: 1) Stricter version control policies; 2) Game launch times fall short of expectations; 3) The risk that the information data used in the research report is not updated in a timely manner.