Bilibili's revenue growth rate accelerated, and non-GAAP operating profit was corrected for the first time. Bilibili's 2024Q3 revenue was 7.3 billion yuan, up 26% year over year. Among them, value-added services, advertising, games, IP derivatives and others were 28/2.1/1.8/0.6 billion yuan, yoy +9%/+28%/+84%/-2%, respectively.

2024Q3 achieved a gross profit margin of 35%, an improvement of about 10pct over the same period last year, mainly due to a sharp increase in revenue and relatively stable operating costs of the platform. Sales Expense Rate/Administrative Expense Rate/R&D Expense Ratio are 16.5%/6.9%/12.4%, respectively. This quarter, the company achieved adjusted operating profit of 0.27 billion yuan, adjusted OPM about 3.7%; adjusted net profit to mother of 0.24 billion yuan, and adjusted NPM of about 3.2%. The company is expected to continue to improve its profitability in the future.

Evergreen Gaming's revenue is stable, and “Three Tricks” performed well. 2024Q3's game revenue increased 84% year over year to 1.8 billion yuan. Among them, “Three Tricks” contributed significantly, entering the top three iOS game bestsellers for three consecutive seasons. At the same time, the two major evergreen games “FGO” and “Azure Line” have entered their eighth and seventh years of operation, but are still performing well.

The advertising growth rate is impressive, and the “one horizontal N vertical” strategy is effective. 2024Q3's advertising revenue increased 28% year over year to 2.1 billion yuan, mainly due to improvements in advertising products and advertising efficiency. The company continues to promote the “one horizontal N vertical” advertising strategy: 1) One horizontal: refers to the infrastructure construction of advertising products, such as multi-screen (mobile phone, PC, pad), multiple scenes (home page information flow, live streaming, search, popular searches, etc.), and multiple products (fireworks plans, take-off plans, etc.) and increase advertising inventory. 2) N vertical: refers to solutions for multiple vertical industries. For example, in addition to the top five major Q3 games, e-commerce, digital appliances, online services, automobiles, etc., the company will also explore more marketing needs in education, mother and child, cultural tourism and other industries. Delivery GMV at Double Eleven B increased by 154% year-on-year, which gave a good boost to Q4 advertising expectations.

After making a profit, it will stick to “commercial growth+community user growth”. Regarding post-profit strategy choices, the company stated that it will adhere to two aspects: 1) commercial monetization: focusing on the two high-margin businesses of advertising and gaming, where revenue growth and profit margin increase are carried out simultaneously; 2) community ecological backfeeding: through commercialization, content creators receive more revenue and feedback on community content construction. We expect that changes in revenue structure and improvements in operational efficiency will further drive improvements in the company's profit level.

Maintain an “Overweight” rating. Based on improvements in the company's profitability, we revised the company's 2024-2026 revenue forecast to be 26.7/30.3/34.1 billion yuan, yoy +18%/14%/12%; non-GAAP net profit -0.175/1.986/3.361 billion yuan. We gave the company (BILI.O)/(9626.HK) a target price of 21 USD/162 HKD, corresponding to 32x 2025e P/E and 19x 2026e P/E, maintaining an “gain” rating.

Risk warning: User growth falls short of expectations, monetization efficiency falls short of expectations, and changes in the macro environment have exceeded expectations.