20% YoY topline in 2Q25 met consensus. RMB573m adj. operating profit beat consensus by 16% primarily due to disciplined operating expenses. We deem Co. will achieve healthy and sustainable profitability growth along the road contributed by diversified high quality revenue streams due to its differentiated content ecosystem and engaged community. Maintain BUY with new PEG based TP of US$28.0/ HK$219.0.
　　Key Factors for Rating
　　Solid ad and resilient VAS offset mobile game cut in 2H25. We deem Co. keeps enhancing its brand reputation on high quality content across various verticals, engaged community with interactive features and functions and diversified offline events. Thus, we expect ad will maintain solid momentum along the road driven by i) dedicated strategies on engaged users; ii) deepened monetisations from various integrated ad products across consumption scenarios and terminals (search, moments, live eC, PC); iii) offline events; iv) optimised algorithm on AI empowerment; and v) strengthened infrastructures.
　　We also expect mobile game will be relatively lukewarm in 2H25 given light pipelines and high base. VAS remains to be facilitated by main subs and streaming, complemented by new innovative monetisation models. Thus, we nudge down our FY2025-27 total revenue forecasts by 1-2% due to 5-8% cut on mobile game from Sanmou and new pipelines. We maintain our solid ad and resilient VAS revenue forecasts unchanged. Our lower adj. EPADS estimates reflect increased opex assumptions and updated diluted share counts.
　　2Q25 profit beat. Total revenue grew 20% YoY to RMB7.3bn, in line with consensus. MAUs/ DAUs grew 8% YoY/7% YoY to 363m/109m respectively.
　　DTSPU was up 6mins YoY at 105mins. Mobile game revenue logged 60% YoY to RMB1.6bn. Online ad continued to outpace industry at 20% YoY to RMB2.4bn, driven by 30%+ YoY growth in performance ads. GPM continued to expand by 0.2ppt QoQ to 36.5%. 7.8% adj. OPM beat consensus of 6.7% with disciplined Opex. Solid deferred revenue grew by 14% YoY/10% QoQ. As of end-Jun 2025, Co. has US$83.6m remaining buyback quota till Nov 2026 regarding its US$200m 2-year schedule.
　　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.
　　Valuation
　　Maintain BUY but cut our PEG based TP to US$28.0/ HK$219.0 on unchanged 1.0x 2025E PEG ratio and slightly decreased 36% 2025E-27E adj. operating profit CAGR and US$0.78 adj. EPADS (vs. US$0.81 previously). This implies 36x/ 27x 2025/26E adj. PER.