2024Q3's performance is steady, optimistic that the launch of new games will drive the product cycle upward, and maintain a “buy” rating

The company achieved operating income of 78.5 billion yuan (+2.91% YoY) and realized net profit of 20.9 billion yuan (-8.33% YoY) in the first three quarters of 2024. 2024Q3 achieved operating income of 26.2 billion yuan (-3.89% YoY, +2.84% month-on-month) and net profit of 6.5 billion yuan (YoY -16.57%, -3.26%), of which revenue from games and related value-added services was 20.9 billion yuan (-4.2% YoY); revenue of 1.6 billion yuan (YoY +2.2%); Cloud Music revenue of 2 billion yuan (YoY +1.3%); revenue from innovation and other businesses billion yuan (-10.3% YoY) The year-on-year decline in net profit in 2024Q3 was mainly due to exchange losses of 1.056 billion yuan, and the company's revenue and profit performance was steady month-on-month.

Based on changes in game schedules and exchange profit and loss, we lowered our profit forecast. We expect the company's net profit to be 293/342/390 yuan (previous value was 339/373/404) billion yuan respectively, corresponding EPS was 9.1/10.7/12.1 yuan, and the current stock price corresponding PE is 13.7/11.7/10.3 times, respectively. We are optimistic that the new game product cycle will drive the company's performance growth and maintain the “buy” rating.

Blizzard games have returned to perform well, and new games such as “The Sixteen Sounds of Yan Yun” and “Marvel Clash” have been released one after another

The popularity of the company's “Fifth Personality” and “Eternity” mobile games has not diminished, and their performance has been stable over a long period of time. “World of Warcraft” and “Hearthstone” achieved outstanding performance after returning to the Chinese market. “World of Warcraft” daily active users increased by more than 50% compared to before discontinuation, and “Hearthstone” daily active users achieved a 150% increase. Since its launch in July, the mobile game “Eternity” has steadily increased in popularity, ranking 4th on the iOS bestseller list. In terms of new games, “Marvel Clash” and “16 Sounds of Yan Yun” will be launched in December, and new products under development such as “Destiny: Rising” and “Marvel's Secret Method Frenzy” will be publicly unveiled. The number of reservations for “Code: Infinity” has already exceeded 5 million. The beginning of a new product cycle such as “16 Sounds of Yan Yun” is expected to continue to drive the company's game business growth.

The profitability of businesses such as Cloud Music and Youdao continues to improve to jointly help the company grow in the long term

Cloud Music continues to promote the high-quality development of the music-centered ecosystem, further expanding the membership scale, and driving the continuous growth of online music revenue and gross margin. 2024Q3 Cloud Music's gross margin reached 32.8% (+0.7 pct year over year, +5.6 pct month over month). 2024Q3, driven by AI, turned a year-on-year operating profit into a profit. For the first time, it achieved profit in the third quarter, and quarterly operating profit reached a record high. Cloud Music and Youdao's continuous improvement in profitability are expected to jointly help the company grow in the long term.

Risk warning: Risks such as the launch time or streaming performance of new games falling short of expectations, and declining streaming of old games.