Incident: Bilibili announced 24Q3 results. In 24Q3, the company achieved operating income of 7.306 billion yuan, a year-on-year increase of 26%; gross margin was 34.9%, up 9.9 pcts year on year, up 5.0 pct month-on-month; achieved adjusted net profit of 0.24 billion yuan (loss of 0.863 billion yuan in the same period last year), turning loss into profit for the first time. Additionally, the company announced that the board of directors has authorized a share repurchase program, and the company can repurchase publicly traded securities of no more than 0.2 billion US dollars within the next 24 months.

“Three Tricks” has driven strong performance in the game business, and pay attention to the performance of the new game “Jujutsu: Return to the Phantom Night”. Bilibili's game business achieved revenue of 1.823 billion yuan in 24Q3, an increase of 84% over the previous year, mainly benefiting from (1) “Sanmou” started the S2/S3 season in 24Q3, and “Sanmou” ranked second in the best-selling season after the opening of the S3 season. The game will enter the S4 “triumph” stage in November and launch an annual script, which includes new maps and gameplay mechanisms, which are expected to continue to attract new users and maintain existing user stickiness; the company's 24Q3 deferred revenue reached 4.106 billion yuan, compared to 4.106 billion yuan At the end of the 24Q2 period, there was an increase of 0.381 billion yuan, which we believe was mainly driven by “Three Tricks”; we expect the game to become an evergreen game and continue to bring stable revenue to the company; (2) “FGO” began its 8th anniversary campaign, and the game rose to sixth place in the best-selling list on July 26, contributing to the company's incremental revenue. In terms of the new game, the company's agent game “Jujutsu Return to the Phantom Night” was officially launched in many parts of the world on November 7. It is recommended to pay attention to the game's subsequent performance.

The advertising business is growing strongly, and there is still room for improvement in ad load rates. The Bilibili 24Q3 advertising business achieved revenue of 2.094 billion yuan, an increase of 28% over the previous year, mainly benefiting from the continuous optimization of advertising products on the platform and the improvement of advertising efficiency. In addition, the company built a highly sticky and continuously growing traffic base market with UP users. 24Q3's DAU/MAU reached 0.107/0.348 billion people each, all of which reached record highs; in addition, the average daily usage time of users was 106 minutes, an increase of 6 minutes over the same period last year. In addition, the company continued to improve the advertising platform infrastructure in 2024. For example, the PC platform was upgraded in the first half of the year to provide one-stop professional advertising tools to drive the number of KA advertisers on the platform to maintain rapid growth, thereby expanding advertising inventory. The platform currently has an ad loading rate of about 6-7%. Compared with other platforms, there is still a certain gap, and it is expected to unleash greater advertising business growth potential in the future.

Profitability continued to increase, and adjusted net profit turned loss into profit for the first time in 24Q3. Benefiting from the continuous improvement of the revenue structure, the company's profitability continued to increase. In 24Q3, an adjusted net profit of 0.24 billion yuan was achieved, turning a loss into a profit for the first time. Looking at the breakdown, the company's gross margin continues to rise, mainly benefiting from (1) high margin businesses, such as gaming (about 60% gross profit) and advertising (gross profit of about 50-60%, of which the gross profit ratio continues to increase over 90%) business revenue share; (2) low margin business, such as live streaming, continues to increase; (3) content/bandwidth cost optimization and the gradual effect of the company's operating leverage. On the cost side, the company strictly controlled expenses during the period. The 24Q3 sales/management/R&D expenses ratio was 16%/7%/12%, respectively, down 0.6/1.7/6.0 pct year on year and 0.4/1.0/2.2 pct from month to month. Looking backwards, we expect Bilibili to achieve an adjusted net profit margin of 10-15% in the medium to long term.

Investment suggestions: The company's game business has reached an inflection point. “Three Tricks” is expected to become Evergreen Gaming to contribute stable game business revenue to the company; the advertising business benefits from platform infrastructure upgrades and high-quality growth on the platform traffic side to continue to increase market share; the release of profitability is accelerated, and the company is expected to reach the company's 10-15% adjusted net profit margin target in the medium to long term. We expect the company to achieve revenue of 27/30.9/34 billion yuan in 2024-2026; adjusted net profit of 0.17/2.253/4.146 billion yuan; the corresponding 25/26 PE is 25.2/13.7 times, respectively, maintaining a “buy” rating.

Risk warning: Competition in the video industry intensifies; macroeconomic fluctuations; user growth falls short of expectations; commercialization falls short of expectations.