24Q3's revenue was 167.193 billion (yoy +8%, qoq +4%). The gross margin was 53% (yoy+4pp, qoq-0.2pp). Net profit to mother (IFRS) for 24Q3 was 53.23 billion (yoy +47%, qoq +12%); net profit to mother (non-IFRS) was 59.813 billion (yoy +33%, qoq +4%).

24Q3 value-added service revenue of 82.695 billion (yoy +9%, QoQ +5%). Among them, game revenue in the international market was 14.5 billion (yoy +9%), thanks to the strong performance of games such as “PUBG MOBILE”; game revenue in the local market was 37.3 billion (yoy +14%), mainly driven by games such as “Fearless Contract”, “Wang Zhe Rongyao”, “Peace Elite”, and “Dungeons and Warriors: Origins”. 24Q4 We expect the game growth rate to continue to grow: 1) 23Q4 games have a low base; 2) the overseas revenue recognition cycle is longer. We expect the increase in game growth to continue until 25Q1. 1) Low base for domestic games in 24Q1; 2) In 25Q1, the “DNF” Lunar New Year version boosted user activity and added a new campaign mode and overseas version of “Operation Delta”. 3) Delays in overseas shipments will continue to be collected. Social networking revenue increased 4% to RMB 30.9 billion, partly offset by a decline in revenue from live music and game streaming services, thanks to the increase in mobile game virtual item sales, paid music membership revenue, and mini game platform service fees.

24Q3 online advertising revenue of 30 billion (yoy +17%, qoq +0%). It is mainly driven by strong demand for video accounts, applets, and WeChat ad inventory. Due to the one-off factor of the Olympics, which buffered the weakness of brand advertising, we expect that Q4 will not exist, and advertising growth expectations will drop significantly.

24Q3 fintech and corporate services revenue was 53.09 billion (yoy +2%, qoq +5%). Among them, revenue from financial management services increased year-on-year due to the increase in the number of users and the increase in customer asset holdings, while revenue from payment services declined due to weak consumer spending. The year-on-year increase in enterprise service revenue was due to the increase in cloud service revenue and merchant technical service fees. We expect fintech to improve in Q4. After the macroeconomic policy was announced, transaction volume increased in October.

We expect the game growth rate to continue to increase. We expect IFRS net profit to be 195.1/224.5/249.8 billion yuan in 24-26 (the original value was 188.6/218.4/245.4 billion yuan in 24-26, we adjusted the profit forecast based on the increase in investment income), and the net profit from non-IFRS to mother for 24-26 is 228.6/261.5/291.4 billion yuan. Using SOTP valuation, a corresponding target price of HK$528.62 (488.69 RMB HKD/RMB=0.92) was given, maintaining the “buy” rating.

Risk warning

Policy risk, risk of game revenue falling short of expectations, competition risk in the advertising industry