4Q24 reported resilient 5% YoY core game revenue contributed by staggering 57% YoY PC but partially offset by weak -11% YoY mobile. 29.2% OPM beat consensus mainly due to disciplined S&M despite underperformed 60.8% GPM. 9% YoY cash revenue meet BOCIe. We deem Co. is reaping rewards by accelerating globalisation with solid core game competencies and committed executions despite recent global rectifications to improve resource allocation efficiency. Along with dedicated generous shareholder return initiatives, we maintain BUY and TP of US$127.0/ HK$198.0.
　　Key Factors for Rating
　　Committed L-T game visions with dynamic resource allocations and streamlined operations. We deem Co. will accelerate their innovation, diversification and game globalisation visions with streamlined R&D allocation and daily operational strategies amid fast-changing global game cycles to generate sustainable momentum. Upcoming pipelines include Fragpunk (global launch in Mar), Once human Mobile (global launch in Apr), WWW console (global launch), Destiny, Ananta, etc. We maintain our strong PC revenue forecasts (38% YoY in 2025) and rebounded positive YoY mobile estimates since 2Q25 based on our channel check. We see recent overseas’ talents and studios adjustments do not have material impact. We slightly lower our FY2025-26E total revenue forecasts by 1% by tweaking PC and mobile estimates and cutting our non-game segments’ estimates. We also cut our FY2025E and 2026E bottom line estimates by 2% and 3% to reflect trimmed GPM and slightly uplift opex assumptions.
　　4Q24: Solid cash revenue; Better PC offset worse Mobile. Total revenue dropped by -1% YoY to RMB26.7bn. Core online game grew 5% YoY to RMB20.5bn, with increasingly divergent mobile and PC game logging -11% YoY and +57% YoY respectively. Blizzard games, WJO II, Naraka: Bladepoint and Marvel Rivals contributed to skyrocketed PC game revenue. GPM contracted YoY/QoQ to 60.8% mainly due to revenue mix shift to low margin games. OPM expanded YoY/QoQ to 29.2% due to disciplined S&M, beating streets’ expectation of 27.0%. Deferred revenue excluding Youdao was RMB14.3bn (up 17% YoY/ down -2% QoQ), leading to +9% YoY/ -10% QoQ cash revenue and in line with BOCIe. Co. has repurchased over US$300m shares this quarter and has remaining US$3.1bn buyback quota till Jan 2026 by end 2024 and distributed improved 65% quarterly dividends.
　　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
　　Maintain BUY and our TP of US$127.0/ HK$198.0 on: i) US$100.0 on unchanged 13.0x FY2025E adj. EPADS of US$7.7; 2) US$4.0 from stakes in Youdao and Cloud Music; and 3) US$23.0 from net cash (assign 20% discount on US$18bn net cash till end Dec 2024).