Mixed 3Q24; Strong PC franchises support N-T game -4% YoY total revenue missed consensus by 1%. -10% YoY mobile game, +29% YoY PC game and +2% YoY/ +26% QoQ cash revenue all surprised the market. 27.3% OPM was slightly below consensus. We forecast strong PC game revenue with over 30% YoY in the next 3 quarters mainly contributed by Blizzard games and new in-house PC franchises ready to launch. We forecast mobile game revenue to resume positive YoY growth starting from 2Q25. Along with committed buyback and quarterly dividend scheme, maintain BUY with new TP of US$105.0/HK$165.0.
　　Key Factors for Rating
　　Strong PC but weak mobile in the N-T. Due to outperformed Blizzard WoW & Hearthstone and our updated pipelines, we expect strong PC game revenue in 4Q24 and 1H25 compared to relatively weak mobile game. We currently forecast mobile game revenue to resume positive YoY growth starting from 2Q25. We believe Co. is making great efforts to accelerate its progress of providing personalised content, game play, social experience and monetisations to satisfy diversified user demands across different terminals after they target at a much bigger audience. Furthermore, Co. also make constant adjustments to improve resource utlisation efficiency to achieve better ROI. Therefore, we raise our FY2024-26E core game revenue forecasts by 2-3% due to 10-15% increase of PC games while -1% cut on mobile games. Our slightly trimmed FY2024-26E adj. diluted EPADS mainly reflect decreased online game GPM forecasts due to game revenue mix shift.
　　3Q24: strong cash revenue; topline and profit miss. Total revenue dropped by -4% YoY to RMB26.2bn, -1% below consensus while 2% above BOCIe. Core online game dropped slightly by -1% YoY to RMB20.2bn, with divergent mobile and PC game logging -10% YoY and +29% YoY respectively.
　　WoW and Naraka: Bladepoint contributed to strong PC game revenue. GPM rose 0.6ppt YoY and flattish QoQ at 62.9%, above consensus and in line with BOCIe.
　　OPM and adj. NPM were 27.3% and 28.6% respectively, both below streets’ expectation. Deferred revenue excluding Youdao was strong at RMB14.7bn (up 11% YoY/ 17% QoQ), leading to +2% YoY/+26% QoQ cash revenue, way above BOCIe. Co. has repurchased over US$500m shares this quarter and has remaining US$3.4bn buyback quota till Jan 2026 by end Sep 2024 and maintained 30% quarterly dividend policies.
　　Key Risks for Rating
　　Downside risks: i) weak macro and online discretionary spending recovery; ii) game regulations; iii) competition; iv) destructive investments; v) dampened partnerships; and vi) ADR delisting.