Co. reported 11% YoY topline and 14.0% adj. NPM with record high 408m DAUs and strong 134mins DTSPUs. RMB150m Kling AI revenue and RMB28m overseas operating profit in 1Q25 impressed the market. We deem Co. dedicates to accelerate its AI, especially Kling, investments, adoptions, integrations and monetisations with frequent features iterations, elevated marketing initiatives and flexible tiered- pricing strategies. However, we see Co. continues to encounter intensified competitions from core domestic eC and online ad segments. Maintain HOLD and TP of HK$50.0.
　　Key Factors for Rating
　　Accelerated AI investments, integrations and monetisations. We see Co. continues to execute its friendly traffic support and subsidy schemes of core ad and eC businesses amid fierce competitions of domestic eC and online ad industries. Regarding AI especially Kling, we expect Co. dedicates to i) iterate feature upgrades more frequently; ii) launch customised products to segmented users; iii) introduce flexible tiered-pricing strategy; iv) accelerate investments and integrations into core eC and ad segments; and v) ramp up marketing initiatives to expand users, improve paying penetration and deepen monetisations globally. Thus, we keep our FY2025-27E total revenue forecasts unchanged with trimmed online ad estimates due to lower take rate assumptions and uplift Kling revenue. We keep our FY2025-27E bottom line estimates unchanged considering Co.’s committed AI-related investments.
　　Largely inline 1Q25 financials with record high DAUs; accelerated Kling monetisation; overseas positive operating profit breakthrough. Total revenue grew 11% YoY to RMB32.6bn, 1% above consensus and BOCIe. User metrics remain solid, with MAUs/ record high DAUs logging 2% YoY/ 4% YoY to 712m/ 408m respectively and DTSPU (daily time spent per user) reaching 134 mins. Online ad revenue decelerated to 8% YoY on high base mainly driven by external ad verticals including short play, mini games, novels and local services. 135m MAC primarily contributed to 15% YoY eC GMV. Outperformed Kling AI revenue was RMB150m primarily facilitated by paying users. Inline GPM was 54.6%. OPM was 13.1%, with 13.9% domestic OPM and overseas generated RMB28m operating profit (2.1% OPM) for the first time. Adj. net profit grew 4% YoY to RMB4.6bn, implying inline 14.0% adj. NPM.
　　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 TP of HK$50.0 on unchanged 10.0x FY2025E adj. EPS.