Performance review

3Q24 non-GAAP net profit slightly higher than our expectations

The company's 3Q24 results: revenue of 7.306 billion yuan, up 25.8% year over year, slightly higher than Bloomberg's agreed expectations (7.129 billion yuan) and our expectations (7.143 billion yuan); non-GAAP net profit of 0.236 billion yuan, slightly higher than Bloomberg's agreed expectations (0.207 billion yuan) and our expectations (0.229 billion yuan), mainly due to higher gaming revenue than expected.

Development trends

Advertising revenue maintained a high growth rate, benefiting from the impressive performance of the “Three Masters” game business. Advertising: 3Q24's revenue also increased by 28% to 2.09 billion yuan. Among them, the company's performance will indicate a year-on-year growth rate of nearly 50%, and is also exploring new industry opportunities on the basis of consolidating dominant categories such as games; during the “Double Eleven” period, the company's GMV delivery also increased by 154%, and overall advertising revenue increased by more than 50%. Looking ahead to 4Q, the company is confident that advertising revenue will maintain healthy growth. At present, investors are concerned about the company's long-term platform business growth space and steady profit margin level. We believe that the effectiveness of the company's commercial infrastructure is gradually released. If the macro environment improves in 2025 and the company's advertising commercialization capacity continues to improve (refined label recommendations, expansion of the advertiser industry, delivery growth, exploration of UP internal circular advertising potential, etc.), the advertising business is expected to grow healthily in 2025. Gaming: Benefiting from the good sales performance of “Three Kingdoms: Determining the World”, 3Q24's revenue also increased by 84% to 1.82 billion yuan. It has been in the top three iOS bestsellers for three consecutive seasons. The company's performance report indicates that “Sanmou” is positioned for long-term operation. The company plans to release the overseas edition of “Sanmou” on 2H25. It is recommended to focus on the continuity of subsequent sales. Value-added services: 3Q24 revenue also increased 8.7% to 2.821 billion yuan.

Gross profit was released sharply, and attention was paid to subsequent profitability elasticity. 3Q24 gross margin also increased by 10ppt to 35%, laying a solid foundation for achieving profits. We judge that it is mainly driven by revenue side allocation, and there is still room for improvement in the future. The 3Q24 sales/management/ R&D expense ratio decreased by 0.2/1.6/5.9ppt to 16.9%/7.0%/12.5%, and 3Q24 net cash from operating activities was 2.225 billion yuan (2Q24:1.751 billion yuan). At the performance meeting, the company stated that its future strategy will continue to focus on the core business of advertising and games, and will always focus on the closed loop of positive feedback on content and commercial growth. The company also announced in the announcement that it will repurchase no more than 0.2 billion US dollars within the next 24 months, reflecting the importance it attaches to shareholder returns and confidence in long-term development.

Community metrics have reached record highs, laying the foundation for healthy and sustainable commercialization. The company's 3Q24 DAU and MAU were 0.107 billions/0.348 billion respectively, both of which reached record highs; the average daily usage time of 3Q24 users was 106 minutes, an increase of 6 minutes over the previous year. We believe that the company has maintained user stickiness with its unique content community, laying the foundation for the healthy and sustainable development of subsequent commercialization.

Profit forecasting and valuation

Considering 4Q sales expenses, adjust the 2024 non-GAAP net loss from 43.95 million yuan to 90.21 million yuan; keep the 2025 non-GAAP net profit forecast unchanged. Currently, Hong Kong stocks are trading 2.3/2.1 times 2024/2025 P/S, and US stocks are trading 2.4/2.1 times 2024/2025 P/S. Maintaining an outperforming industry rating and SOTP valuation method, considering changes in revenue structure in 2025, the VAS business revenue growth rate may slow down, reducing the target price of Hong Kong stocks by 1.1% to HK$188/the target price of US stocks by 4% to $24, Hong Kong stocks corresponding 2.7/2.4 times 2024/2025 P/S, US stocks corresponding 2.6/2.3 times 2024/2025 P/S, and the potential upside for Hong Kong equities/US stocks is 16%/13%.

risks

The growth of the advertising business fell short of expectations, game traffic fell short of expectations, and the cost reduction and efficiency process fell short of expectations.