We forecast Blizzard PC games (WoW and Hearthstone), Naraka PC/ console and 4 in-house newly launched PC games will be main growth engines to drive c.40% YoY PC revenue in the following three quarters.
　　Moreover, Co. is accelerating their ROI-oriented assessments globally in terms of game development and game operations to improve resource utilisation efficiency. We are confident on Co.’s core game competencies and competitive moats. Along with committed shareholder return initiatives with both buyback and dividend schemes leveraging ample cash position, maintain Top BUY and raise TP to US$115.0/ HK$181.0.
　　Key Factors for Rating
　　Blizzard and newly launched in-house games drive N-T PC. We expect outperformed Blizzard games (WoW and Hearthstone) and newly launched in- house “Marvel Rivals” and “Once Human” globally, especially overseas performance, will provide visible PC incremental in the near term. In addition, we expect in-house titles “Where Wind Meet” PC (set to be launched on 27 December 2024) and “Fragpunk” PC will contribute PC growth in 2025. Thus, we slightly uplift our FY2024/25E PC game revenue forecasts by 1%/ 2% to reflect the contributions of the above games.
　　More ROI-oriented assessments. We see Co. is accelerating their ROI- oriented adjustments globally in terms of both game development (projects, partners and global 1P studio organisation restructure) and game operations (game suspension, content updates, marketing and team restructure). We deem these adjustments will not impact Co.’s financials and core competencies, as well as their L-T global game vision but will improve resource utilisation efficiency.
　　Thus, we largely maintain our FY2024-26E GPM and bottom line estimations unchanged.
　　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.
　　Valuation
　　We roll over our TP to use 2025E estimates. Maintain BUY and raise our TP to US$115.0/ HK$181.0 on: i) US$90.0 on 12.0x FY2025E adj. EPADS of US$7.53; 2) US$3.0 from stake in Youdao and Cloud Music; and 3) US$22.0 from net cash (assign 20% discount on US$17bn net cash till end Sep 2024).