In 2Q23, total revenue decreased by -2% YoY/ increased by 5% YoY on constant currency to US$440m, in line with consensus. MAUs and DAUs grew 1% QoQ to 599m/ 258m. OPM/ Non-GAAP NPM were 28.0%/ 28.7%. Despite committed efforts on content, optimisation, efficiency and integration, we expect softer ad rebound in 2H23 for Co. considering their advertisers’ mix, brand-oriented recognition, refined strategies from key verticals and intense competition amid weak macro. But we still remain optimistic on their improved monetisation and operational efficiency on core edges and large engaged traffic.Maintain BUY but cut our TP based on 9.0x 2023E Non-GAAP EPADS.
　　Key Factors for Rating
　　Committed strategies amid softer ad rebound. We see Co.’s continuous efforts to i) accelerate investments on content ecosystems especially top content creators of key verticals; ii) optimise ad infrastructures and distribution mechanisms; iii) improve efficiency on streamlined operations and channel investments; iv) integrate content with key hot trends/ topics features; and v) extend partnerships within core verticals to enhance their competitive edges.However, we deem it will take longer for Co.’s ad to rebound on i) their brand- oriented recognitions among advertisers; ii) advertisers’ mix with over c.2/3 from discretionary consumption verticals; iii) key advertisers’ refined marketing and operational strategies amid weak macro and fierce competition; and iv) intense ad competition especially from main Internet platforms. Along with FX impacts, we cut our 2023/24/25E total and ad revenue by 5%/ 8%/ 8% respectively.Despite lower revenue forecasts, we slightly raise our 2023-25E margin estimations to reflect improved cost efficiency and disciplined cost controls.
　　2Q23: in-line topline with improved efficiency. Total revenue of US$440m (down -2% YoY/ up 5% YoY on constant currency basis) was in line with consensus. Core online ad delivered flattish YoY/ 7% YoY on constant currency to US$386m, benefitted from offline events resumptions, holidays and 618 eC festival. Non-Alibaba and Alibaba ad revenue logged -1% YoY and 13% YoY respectively. Regarding verticals, auto, handset, luxury, entertainment, travel and healthcare sectors shown decent growth while cosmetics, personal care and game sectors delivered slower-than-expected recovery mainly on clients’ own marketing/operational strategies, new products launch cycles and intense competition. MAUs/ DAUs remained intact, edging up 1% QoQ to 599m/ 258m respectively. GPM of 78.6% was in line with consensus. OPM rose 7.2ppts YoY/ 4.7ppts QoQ to 28.0%. Non-GAAP NPM of 28.7% was above consensus.
　　Key Risks for Rating
　　Downsides: (i) marketing behavioural change of key advertisers; (ii) slower- than-expected macro and ad rebound; (iii) competition; and (iv) ADR delisting.
　　Valuation
　　Maintain BUY but cut our TP to US$19.00/ HK$152.00, based on 9.0x (down from 10.0x previously) 2023E Non-GAAP EPADS of US$2.15.