Accelerating 13% YoY topline in 1Q25 led consensus/ BOCIe by 3% with consistent GPM expansion thanks to business efficiency improvements from deepened AI implementations. Being the largest content provider across formats and social platform in China, we expect Co. to capture sustainable AI generated gains in terms of production, distribution and monetisation. Reiterate our Internet platform top BUY recommendation with uplifted TP of HK$634.0.
　　Key Factors for Rating
　　Deepened AI adoptions. We deem Co. accelerates AI investments, integrations and adoptions into its unique social ecosystem to fulfill diverse participants’ demands across scenarios while progressively monetising at a relatively generous pace. Given its committed high-quality growth strategy on engaged community comprising various integrated functionalities, modules and infrastructures, Co. has already built a virtuous cycle with Op leverage generated by sustainable high-margin revenue stream momentum by reinvesting into AI evolvements.
　　Key Forecasts change: We primarily raise our FY2025-27E VAS game revenue forecasts by 3-4% to reflect outperformed evergreen titles, especially PC ones, updated pipelines and deferral policies. At the meantime, FY2025-27E online ad revenue forecasts are raised by 3-8% to reflect direct benefits brought by AI, increased user engagements and internal ad from eC initiatives. We largely keep FBS revenue forecasts unchanged. Uplifted gross profit estimates reflect revenue mix structural shift across three segments, mobile game optimised channel fees and improved cost efficiency. Although we slightly increase our FY2025-27E total Opex forecasts by 1% to assume more AI investments related to depreciation, talents and promotions, our FY2025-27E adj. EPS estimates are raised by 1-2%.
　　1Q25: clean beat on remarkable game and ad momentum. Total revenue continued to accelerate at 13% YoY to RMB180.0bn, 3% beat consensus and BOCIe. Domestic and overseas games revenue both continued to deliver accelerated 24% YoY and 22% YoY respectively, significantly outperforming BOCIe by 6% and 8%. Moreover, evergreen titles HoK and CFM reached record high gross billings in 1Q25. Outperformed ad revenue also displayed accelerated 20% YoY contributed by video accounts (ad revenue continued log 60%+ YoY), mini programme and weixin search. FBS revenue slightly rebounded at 5% YoY, with fintech and business services revenue logging LSD % YoY and teens % YoY respectively. Outperformed GPM was 55.8%. Excluding RMB4bn one-off SBC from the restructuring of an overseas subsidiary, adj. core operating profit grew 17% YoY with adj. core OPM reaching 34%, in line with consensus.
　　Key Risks for Rating
　　Downside risks: 1) regulations on games, fintech, online ad, streaming, personal data, taxation, etc.; 2) intensified competition for key segments; 3) weaker-than-expected macro; 4) destructive investments; 5) accelerated share divestment from main shareholders.
　　Valuation
　　Reiterate BUY and lift our SOTP TP to HK$634.0 on our updated estimations with unchanged corresponding 2025E multiples assigned to each segment (18.0x PER for online game, 20.0x PER for online ad, 15.0x PER for fintech & BS, 6x PSR for cloud) and latest subsidiaries and investments’ valuation.