4Q24 9% YoY topline missed consensus by 1% primarily due to decelerated 13% YoY ad. User metrics remained healthy. 143m eC MAC (+10% YoY) drove 14% YoY eC GMV. RMB4.7bn adj. net profit met streets’ expectation. We deem Co. will structurally dedicate to increase its AI investments to solidify Kling’s global leading position and integrate it into core content and commercialistaion ecosystems at a faster pace, as well as monetising through both 2C and 2B channels but with non-material revenue contribution in 2025. We expect domestic online ads and eC will remain competitive. Maintain HOLD.
Key Factors for Rating
Intensified competition of domestic core ads and eC; Acclerated Kling AI integration and monetisation. We expect intensified competition on domestic online ads and eCommerce industries to sustain in 2025 amid current macro conditions and peers’ strategies. We deem Co. will structurally and dynamically increase its AI-related investments, integrate its core Kling AI into core content and commercialisation ecosystems at a faster pace and monetise through both 2-C (introduced in July 2024) and 2-B (introduced in Oct 2024) channels in 2025, especially in overseas market. However, we do not expect material revenue additions from Kling AI monetisations in 2025. Thus, we kept our FY2025 topline forecast unchanged with uplifted streaming and Kling revenue estimates while trimming online ad and eC revenue forecasts. We slightly cut our FY2025-26E GPM to mainly reflect increased AI-related costs. Also, we nudged down our bottom line estimates to primarily reflect increased AI investments.
4Q24 ad relatively soft while streaming outperformed; Profit in line. Total revenue grew 9% YoY to RMB35.4bn, -1% below consensus and BOCIe. User metrics were resilient, with MAUs/ DAUs both logging 5% YoY to 736m/ 401m respectively and DTSPU reaching 126 mins. Online ad revenue decelerated to 13% YoY mainly driven by external advertisers, especially short plays, mini games and novels, leading to HSD YoY increase of eCPM. While internal ads growth was impacted by new SME merchants’ supportive initiatives. +10% YoY MAC of 143m primarily contributed to 14% YoY eC GMV. GPM was in line at 54.0%. OPM was 12.1%, with 12.8% domestic OPM and overseas operating loss reaching -RMB236m. Adj. net profit grew 8% YoY to RMB4.7bn, with adj. NPM remaining stable YoY at 13.3%, also meeting streets’ expectation.
Key Risks for Rating
Upside risks: 1) monetisations ramp up of AI and new initiatives; 2) domestic consumption recovery; 3) increased shareholder return initiatives.
Downside risks: 1) regulations; 2) intensified competition; 3) slower-than- expected macro recovery; 4) ineffective strategy executions; 5) content supply and source; 6) ineffective monetisation; 7) main shareholders’ divestiture.
Valuation
Maintain HOLD and slightly trim our TP to HK$50.0 on unchanged 10.0x FY2025E adj. EPS of HKD5.03 (vs. HKD5.17 previously).