The impressive performance of the 2023Q1 game business has driven rapid growth in the company's performance, maintaining the “buy” rating 2023Q1 to achieve operating income of 25 billion yuan (+6.3% year on year) and net profit of 6.8 billion yuan (+53.7% year-on-year). Among them, game business revenue was 201 billion yuan (+7.6% year-on-year), “Journey to the West” and “Journey to the West”
The performance of other core products was steady, the number of “Egg Party” users grew strongly, and the 2023Q1 reached the top of the iOS download list in China. Cloud Music's revenue was 2 billion yuan (-5.2% year-on-year), mainly due to the reduction in the display of live streaming functions within the app and the reduction in revenue share ratio between anchors and guilds, which reduced the revenue share ratio of anchors and guilds. Youdao's revenue was $1.3 billion (-3.1% YoY). Revenue from innovation and other businesses was $1.9 billion (+12.8% YoY). Based on expectations for the company's products, we maintain our 2023-2025 profit forecast. It is estimated that the company's net profit for 2023-2025 will be 228/254/28.1 billion yuan respectively, and the corresponding EPS will be 7.1/7.9/8.7 yuan respectively. The current stock price corresponding to PE is 16.3/14.6/13.2 times, respectively. We are optimistic that the launch of new games will drive performance growth and maintain the “buy” rating.
The increase in gross margin of gaming and cloud music led to an improvement in the company's profitability. The gross margin of the company's game business in 2023Q1 was 66.7% (+4.5pct year-on-year, +7.6pct month-on-month). This was mainly due to the confirmation of copyright fees for several agency games and changes in revenue from self-research and agency games in 2023Q4. The gross margin of the cloud music business was 22.4% (+10.2pct year-on-year, +4.6 pct month-on-month), mainly due to continued improvements in cost management and control. Driven by the increase in gross margin of gaming and cloud music, the company's overall gross margin increased to 59.48% (+5.0 pct year-on-year, +7.2 pct month-on-month), and the company's net profit margin increased to 26.97% (+8.3 pct year on year, +11.4 pct month-on-month). We believe that as the share of revenue from self-developed games increases and Cloud Music's copyright costs continue to be controlled, the company's gross margin is expected to continue to increase, driving the company's profitability to continue to improve.
AIGC technology helps reduce costs and increase efficiency. It is optimistic that the launch of new games will bring impressive performance increases. In 2023Q1, the company invested 3.7 billion yuan in R&D (+10% year-on-year), and continues to promote the integration of AI technology into digital content production. At present, the company's self-developed AI technology has been applied to the whole process of game industrialization, and AI technology has increased work efficiency in key areas by up to 90%. In addition, the company has a rich inventory of products, including “Extraordinary Pioneer” (beta on June 8), “Peak Fast” (beta on June 20), “Mobile Game Against Water Cold” (beta on June 30), etc.
We believe that the launch of boutique games one after another is expected to bring considerable performance increases to the company. The integration of AIGC technology and games is expected to reduce costs and increase efficiency, and further open up room for long-term growth.
Risk warning: Risks such as the launch time or performance of new games falling short of expectations, and declining sales of old games.