22% YoY topline in 4Q24 met streets’ expectation. Historical high 36% GPM led to Co.’s first quarterly GAAP profitability. Adj. OPM further expanded QoQ to 6%. We expect Co. will execute committed strategies for online game, ad and VAS in 2025. SanMou, enhanced ad commercialisation capabilities and new VAS initiatives will continue to be solid driving forces for these segments respectively. We also envision sustained benefits brought by open source AI integrations on key businesses leveraging high quality contents and engaged users. Maintain BUY and raise our PEG based TP to US$25.0/ HK$198.0.
　　Key Factors for Rating
　　Committed strategies for key segments; AI integrations unleash L-T imaginations on high quality content and engaged users. We see Co. will dedicate to execute key strategies for game, online ad and VAS businesses in 2025. We expect SanMou will continue to be the main certain driving force for game and we lift its game revenue forecasts by 10%/ 6% to RMB4.2bn and RMB3.7bn in 2025 and 2026 respectively. Enhanced infrastructure, upgraded product, optimised algorithm empowered by AI and open eC ecosystem will contribute to sustainable online ad momentum. Leveraging high quality content and engaged young generation users, Co. will be the main beneficiary with their open platform strategy on open source AI integrations. Thus, we largely maintain our FY2025-26E revenue forecasts unchanged. We slightly uplift our FY2025-26E bottom line estimates by 2% to reflect our dynamic assumptions on opex items (more S&M while less R&D) with unchanged GPM forecasts. We currently estimate RMB2.2bn and RMB3.0bn adj. net profit in 2025E and 2026E respectively.
　　4Q24: first quarterly GAAP profitability milestone on historical high GPM. Total revenue grew 22% YoY to RMB7.7bn, 1% above consensus. MAUs/ DAUs grew 1%/3% to 340m/103m. DTSPU was 99mins. Mobile game continued to be strong, surging 79% YoY to RMB1.8bn. Online ad remained solid, rising 24% YoY to RMB2.4bn driven by strong performance ads. GPM continued to expand to historical high level of 36.1%, leading to Co.’s first ever GAAP profitability. Adj. OPM further expanded from 4% in 3Q24 to 6% in 4Q24. Co. has utilised 8% of their 2-year US$200m buyback quota till Nov 2026 by end Dec 2024.
　　Key Risks for Rating
Downside: (i) slower-than-expected macro recovery; ii) Ineffective monetisation; (iii) content creator and user engagement; (iv) content supply and quality; and (v) regulations on games, streaming, advertising, data collection, taxation, etc.