Matters:

The company released its 24Q3 quarterly report, achieving total revenue of 31.131 billion yuan (yoy +11.4%), gross profit margin of 54.3% (51.7% in the same period last year), net profit of 3.27 billion yuan (yoy +49.9%), and adjusted net profit of 3.948 billion yuan (yoy +24.4%).

Commentary:

Traffic data all improved year over year, and Nikkyo broke through the 0.4 billion milestone to a record high. Currently, short video has a large user base and high penetration rate. The company continues to deepen its high-quality user growth strategy, and by upgrading its marketing channel delivery capabilities, it also protects the user experience while improving its commercialization capabilities.

24Q3 achieved DAU of 0.408 billion (yoy +5.4%), MAU of 0.714 billion (yoy +4.3%), the average daily user usage time was 132.2 minutes (yoy +1.8%), and DAU/MAU reached 57.1%, which remained flat from month to month.

Core commerce drives revenue growth, and advertising performance is outstanding; e-commerce uses content markets as a starting point and goes deep into shelf construction. Looking at the revenue split: ① 24Q3 advertising revenue reached 17.63 billion yuan (yoy +20%), and external circulation advertising became the main driving force for growth, driven by categories such as skits/e-commerce platforms/local lifestyle. Q3 accelerated the IAA (In-Apps Ads) rollout, leading to a year-on-year growth rate of over 300% in skit marketing; through UAX (fully automated delivery solution), the advertising stability of advertisers was improved, and UAX's share of external circulation consumption increased to 50%. In terms of internal circulation, full-site marketing solutions and intelligent hosting products account for about 50% of internal circulation consumption, and intelligent marketing has become the basic capability of merchant marketing. ② Other business revenue reached 4.16 billion yuan (yoy +18%), of which e-commerce GMV reached 334.2 billion yuan (yoy +15%) in line with expectations. Pan-shelf e-commerce's share of GMV increased to 27%, and the MAC penetration rate remained flat at 18.6% month-on-month. Supply-side richness increased: in Q3 the number of merchants yoy +40%, the number of new merchants yoy +30%, and the number of product categories yoy +20%; demand-side increase: the number of active buyers reached 0.133 billion (yoy +12%) in Q3, and diversified marketing gameplay effectively improved user size and transaction efficiency. ③ Live streaming revenue is 9.34 billion yuan (yoy -4%). Under the normalized supervision of the industry, revenue contraction was better than expected. The union's refined operation capabilities have been improved, and various live streaming methods have encouraged anchors to produce high-quality content, and use the “live streaming +” model to drive rapid recruitment and the development of the ideal home business.

The pace of profit release may continue, and the expense ratio remains stable. The gross margin for 24Q3 was 54.3% (53.9% expected, 51.7% in the same period last year), which represents a continued increase in the share of high-margin businesses and an increase in the efficiency of server and bandwidth usage. We believe that with the optimization of the revenue structure, gross margin still has potential to increase. In terms of cost ratio, sales expenses rose slightly to 33.3% month-on-month, and overall user growth and maintenance costs were stable; R&D expenses remained flat month-on-month, at 9.7%. Although there is some incremental investment in AI, the overall impact on the revenue share is manageable. The adjusted net profit for Q3 reached 3.948 billion yuan (yoy +24.4%), and the adjusted net profit margin was 12.7%, in line with previous expectations.

AI matrices optimize operations and empower content and commercial ecosystems. According to financial reports, the average daily consumption of AIGC marketing materials from marketing customers in Q3 is over 20 million yuan. Since its release in September, Keling AI 1.5 has led the industry in terms of image quality, dynamic performance, and semantic response speed. The cumulative number of Keling users exceeded 5 million, and user retention increased month by month, achieving monthly activity of over 1.5 million in September. Since the end of July, Keling has successively introduced member payment systems at home and abroad, and officially opened an API interface at the end of September, covering modules such as video generation, image generation, and virtual fitting. The company said that at present, the commercialization of Keling AI exceeds 10 million yuan per month. The progress is in line with expectations, and the scale of revenue is expected to increase next year.

Investment advice: Considering the macroeconomic impact on consumption and the slowdown in the growth rate of short video e-commerce in the current market environment, etc., we adjusted the company's 24-26 revenue to 127.2/139.9/153.1 billion yuan (originally forecast was 127.3/142.6/156.4 billion yuan), respectively, up 12%/10%/9% year-on-year. Under NON-IFRS, net profit to mother is forecast to reach 17.6/22.3/25.7 billion yuan (the original forecast was 17.6/22.7/28.3 billion yuan), an increase of 72%/27%/15% year over year. The analysis was carried out using the SOTP valuation method, and the target market value for 2025 was HK$261.3 billion (exchange rate is RMB 0.92 /HKD), corresponding to the target price of HK$60.58.

Risk warning: Risk of stricter regulation of live e-commerce, risk of anchor inappropriate remarks affecting platform image, channel competition disrupting traffic structure, etc.