Accelerated 16% YoY total revenue and narrowed -4.6% adj. operating loss margin both outperformed consensus. Mobile game and online ad revenue delivered 13% YoY and 30% YoY respectively. We deem Co. will generate sustainable profitability since 3Q24E with enhanced and enriched monetisations and improved operational efficiency on healthy user and content ecosystems. Maintain BUY while cut our TP to US$17.0/ HK$132.0 on 1.9x blended 2024E sales by key segments.

Key Factors for Rating

Sustainable profitability with enhanced moneitisations and improved efficiency. We deem Co. will tap into profitability era since 3Q24E given their diversified and enhanced monetisations with improved operational efficiency on healthy users, enriched content offerings, upgraded infrastructures and advanced algorithm. We see new SLG game will significantly boost 2H24 game revenue and currently forecast their FY24E and normalised annual booked revenue in FY25-26E are RMB2.3bn and RMB2.5-3bn respectively on their deferred policy and grossing estimation. Thus, we trim our FY2024-26E total revenue estimates by 2-3% with lower mobile game, unchanged online ad and streaming cut estimations due to Co.'s proactive strategic shift towards quality (gross profit). We uplift our FY2024-26E GPM estimations by ~70-130bps to reflect optimised revenue mix shift and improved cost efficiency. We currently estimate Co. will generate RMB1.6bn and RMB2.5bn adj. net profit with 5% and 7% adj. NPM in FY2025E and FY2026E respectively.

2Q24: Enhanced monetisation and efficiency on healthy traffic. Total revenue delivered accelerated 16% YoY to RMB6.1bn, 1% above consensus. MAUs/ DAUs grew 4%/ 6% to 336mn and 102mn respectively, with D/M ratio stably standing at 30%. DTSPU was 99 mins. Mobile game returned to positive 13% YoY territory thanks to new SLG game. Online ad remained robust at 30% YoY to RMB2.0bn driven by over 40% YoY performance ads. GPM kept expanding 6.8ppts YoY/ 1.6ppts QoQ to 29.9%, above streets' expectation. With prudent opex, adj. operating loss margin further narrowed to -4.6% from - 17.5% in 2Q23 and -9.0% in 1Q24. Co. has generated over RMB1.7bn OCF this quarter and deferred revenue increased by +25% QoQ on strong game and ad by end June.

Key Risks for Rating

Downside: (i) slower than expected macro recovery; ii) ineffective monetisation;

(iii) content creator and user engagement; (iv) content supply and quality; and (v) regulations on games, streaming, advertising, data collection, taxation, etc.

Valuation

Maintain BUY while cutting our TP to US$17.0/ HK$132.0 on 1.9x blended 2024 PER from 4 key business segments on our updated 2024E segment revenue estimations and corresponding peers' valuation (peers re-rating). This implies 30x/ 19x 2025/26E adj. EPADS based on our estimations.