The company announced results for the third quarter of 2024, achieving revenue of 7.306 billion yuan, a year-on-year increase of 26%, and adjusted net profit of 0.236 billion yuan, turning a year-on-year loss into a profit.

The first profit was achieved in a single quarter, and the financial situation improved markedly. The company achieved revenue of 7.306 billion yuan in Q3, an increase of 26% over the previous year, and adjusted net profit of 0.236 billion yuan. The same period last year was a net loss of 0.863 billion yuan, adjusted operating profit of 0.272 billion yuan, and a loss of 0.755 billion yuan in the same period last year. Gross profit was 2.547 billion yuan, up 76% year on year, and gross margin rose to 34.9%, up 9.9pct year on year. Operating cash flow was 2.226 billion yuan, compared to 0.277 billion yuan in the same period last year. In terms of costs, operating costs for the third quarter were 4.758 billion yuan, an increase of 9% over the previous year, mainly due to an increase in game-related revenue sharing costs, but content costs declined. In terms of expenses, marketing expenses related to new games led to a 21% year-on-year increase in sales expenses, and the termination of some game projects led to a 15% year-on-year reduction in R&D expenses.

By business situation: The strong performance of “Three Kingdoms” has driven a significant acceleration in the game business, and advertising revenue continues to grow healthily.

1) Value-added service business: achieved revenue of 2.821 billion yuan, an increase of 9% over the previous year, mainly driven by the growth of users paying for live streaming and other value-added services;

2) Advertising business: Achieved revenue of 2.094 billion yuan, an increase of 28% over the previous year, mainly from the optimization of advertising products provided by the company and the improvement of advertising efficiency;

3) Mobile game business: achieved revenue of 1.823 billion yuan, an increase of 84% over the previous year. The SLG game “Three Kingdoms: Designing the World” ranked in the top five iOS game bestsellers for many consecutive days after launch on June 13, and rebounded markedly after the season was renewed on August 3 and September 21; 4) IP derivatives and other businesses: achieved revenue of 0.567 billion yuan, a year-on-year decrease of 2%.

High-quality content continues to break through, and the younger generation of the game category creates a highly active community. In terms of operating data, daily active users of Station B reached 0.107 billion in the third quarter of '24, an increase of 4% over the previous year, and 0.348 billion monthly active users. The average daily usage time increased from 100 minutes in the same period last year to 106 minutes, all of which are record highs. The average number of monthly interactions is 19.3 billion, and the number of members is 21.97 million. Under the rich content supply, the community has maintained a high level of activity, driving more than 2.7 millionup in revenue from B-station since this year. The company's advertising growth rate in the third quarter was higher than the industry average, and GMV delivered by the platform increased by 154% year-on-year during the Double Eleven period. In addition, the company adheres to a boutique strategy, and high-quality content continues to be released, such as “The Legend of the Shepherd” and “Guarding the Liberation of the West 5”. The total number of broadcasts on the official “Black Myths: Goku” Station B website exceeded 0.2 billion, and the number of barrages and broadcasts exceeded 1 million. “Three Kingdoms: Designing the World” entered the top three iOS game bestsellers for three consecutive seasons, and the effect of breaking the circle was obvious.

Maintain an “overweight” investment rating. The company's community is healthy, and the launch of various agent games in 2024 contributed to an increase in performance; in terms of advertising, the company released four major scenario marketing plans, including “new product release, rejuvenation, transaction conversion, and big node”. At the same time, it also stated that it will focus on penetrating more high-traffic scenarios such as dynamic and hot search, which is expected to further drive revenue growth. In the long run, it is also expected to benefit from the growth in the AI-related knowledge payment market size and the increase in marketing budgets related to AI applications; the company's adjusted net profit was corrected for the first time in the 3rd quarter of '24, considering the results of the company's: 1) game product flow exceeding expectations, 2) high gross profit Continued increase in advertising share is driving up profit margins. 3) The gross margin of the live streaming and conference membership business is expected to continue to increase, as well as continued effective fee control measures. The company's revenue forecast for 2024-2026 was raised to 26.7, 30.9, and 34.6 billion yuan. The adjusted net profit to the mother is 0.078, 1.93, and 2.81 billion yuan, maintaining the “increase” rating.

Risk warning: User growth falls short of expectations, industry regulation risk, mainstream UP risk loss, and increased competition risk.