24Q3 revenue was 26.2 billion (yoy -3.9%, qoq +2.8%). The year-on-year increase was mainly due to an increase in mobile game net revenue.

The Q3 gross profit margin was 62.9% (yoy+0.7pp, qoq-0.1pp). The year-on-year increase was mainly brought about by the increase in Cloud Music's gross margin. Sales rate 14.52% (yoy+1.4pp, qoq+0.8pp); management rate 4.2% (yoy-1.3pp, qoq-0.1pp); R&D rate 16.9% (yoy+0.9pp, qoq-0.6pp). GAAP net profit 6.54 billion (yoy -16.6%, qoq -3.3%), non-GAAP net profit 7.5 billion (yoy -13.3%, qoq -4.1%).

The total revenue from games and related value-added services in 24Q3 was 20.86 billion (yoy -4.2%, qoq +4.0%), and Q3 deducted 14.7 billion yuan of external contract liabilities (+2.1 billion yuan). The gross profit margin was 68.8% (yoy-0.2pp, qoq-1.2pp), and the decline in gross profit was mainly due to the decline in mobile games. Among them, mobile game revenue was 14.3 billion (yoy -9.7%, QoQ -2.9%), and mobile game revenue was 5.9 billion (yoy +29.0%, QoQ +30.0%). Q3 The new game “Eternity” was launched on July 23, and the return of the Blizzard game “World of Warcraft” brought about a significant increase in mobile games. The game's DAU increased by 50% compared to before the shutdown. Q4 We expect the return of the Blizzard game “Hearthstone” to bring about a significant increase in mobile games. The game's DAU is 150% higher than before it closed. Mobile games such as “16 Voices of Yanyun” and “Seven Day World” are also in reserve. We expect Q4 revenue to reach 21.7 billion (yoy +4%, qoq +4%).

24Q3 Cloud Music's revenue was 2 billion (yoy +1.3%, qoq -2.0%). The year-on-year increase was mainly due to an increase in membership subscription revenue. Cloud Music's gross profit margin was 32.8% (yoy+5.6pp, qoq+0.7pp). The year-on-year increase in gross profit was mainly due to the increase in membership subscriptions to effectively control costs.

24Q3 had revenue of 1.57 billion (yoy +2.3%, qoq +19.0%). The year-on-year increase was mainly due to growth in online marketing services and smart devices. There is a gross profit margin of 50.2% (yoy-5.6pp, qoq+2.0pp). The month-on-month increase in gross profit was mainly due to the increase in revenue from smart devices and learning services, and the year-on-year decline in gross profit was mainly due to the decline in revenue from learning services.

The company's new mobile games such as “Seven Day World” and “16 Voices of Yan Yun” are expected to be launched one after another to drive growth. We estimate that the company's net profit for 24-26 will be 28.7/32.5/34.9 billion yuan (the original 24-26 was 29.6/35.2/39.6 billion yuan, and the profit forecast was adjusted due to adjustments to the pace of game launches). We used SOTP valuation and gave a target price of 149.00 HKD/134.69 yuan (HKD/CNY=0.9), maintaining a “buy” rating.

Risk warning

New game performance falls short of expectations; version approval uncertainty; game net interest rate fluctuates; competition for live streaming intensifies