Introduction to this report:
The reduction in community ecological health losses in the first quarter exceeded expectations, and losses are expected to narrow steadily throughout the year when the main business recovers.
Maintain an “increase in holdings” rating. Losses in the first quarter were better than expected, the core business of community ecological health recovered steadily, and the company's profitability continued to improve, and losses were expected to continue to narrow throughout the year. We maintain our profit forecast. We expect the company's adjusted net profit to be 34.89/-10.05/1,971 billion yuan in 2023-2025, maintaining the target price of HK$203.95 and maintaining the “increase in holdings” rating.
The steady loss of revenue was better than expected, and the ability to reduce costs and increase efficiency was once again confirmed. The company achieved revenue of 5.070 billion yuan in 23Q1, +0.3% year on year, gross profit margin of 22%, +1.4pct month on month. The recovery in advertising brought about an improvement in gross profit; adjusted net profit of -1,031 billion yuan, -38% year on year. The loss margin was better than market expectations under cost reduction and efficiency, and losses narrowed month-on-month for 3 consecutive quarters.
User stickiness has increased, and the Up-based growth is good, and the community ecosystem is prosperous. On the operating side, the company's average MAU and DAU in 23Q1 were 315 and 94 million people, respectively, +7%, +18%, DAU/MAU 30%, +2pct. The average daily usage time of users was 96 minutes, the same as the previous month. The number of regular members was 205 million, accounting for the share of MAU up to 29.75%. The increase in the penetration rate of DAU/MAU and members confirmed high-quality growth; the number of daily active up owners was +42% compared to the same period last year; the number of up owners with more than 10,000 fans was +48% compared to the same period last year, and the number of players receiving revenue from Station B reached +48% 1.5 million people, +50% compared to the previous year. The commercialization of Upmaster is good, and the impact of “stop the tide” is manageable, and the community ecosystem is still thriving.
Performance ads are driving a revival of advertising, and new game products will be launched soon. On the revenue side, the company achieved advertising revenue of 1,227 billion yuan in 23Q1, +22% year on year, of which the growth rate of effective advertising was nearly 50%, and advertising ecosystem construction and efficiency improvements drove advertising revenue recovery; 23Q1 achieved revenue of 2.196 billion yuan from live streaming and value-added services, +5.07% compared to the previous year. Among them, the number of major members was 2020 million, with a penetration rate of 6.41%. The video upowners who received live streaming revenue reached 700,000, and the live content ecosystem continued to grow; 23Q1 achieved game revenue of 1,132 billion yuan, compared to -16.66% year on year, Q2 The intermodal transport games “Crash: Stardom Railroad” and “Back to the Future: 1999” were very popular, and the summer programs of various products such as “Pretty Girl” and “Shake Light” will soon be launched; 23Q1 achieved revenue of 510 million yuan from IP derivatives and other businesses, -15.47% compared to the previous year, and derivatives sales declined due to business strategy adjustments.
Risk warning: Macro consumption continues to weaken, and the recovery of the advertising industry falls short of expectations; the game's launch progress has fallen short of expectations, and the company's marketing investment is higher than expected.