Core game revenue grew 15% YoY in 1Q25, leading consensus/ BOCIeby 5%/ 2%. +85% YoY PC games met BOCIe and -4% YoY mobile gamesled BOCIe by 3%. Adj. net profit grew 32% YoY to RMB11.2bn,significantly beating consensus/ BOCIe at 25%/ 30%, mainly contributedby outperformed GPM and disciplined S&M. Cash revenue was solid at+17% YoY/ +30% QoQ. We see Co. is enjoying near-term benefits fromvarious streamlined adjustments on projects (both existing and new),investments, operations and channel optimisations. Therefore, wesignificantly raise our FY2025 adj. profit forecast by 14% with estimated21% YoY to RMB40.5bn. Maintain BUY and raise our SOTP TP toUS$140.0/ HK$220.0 with unchanged 13.0x 2025E core adj. PER.
　　Key Factors for Rating
　　Efficiency-oriented streamlined adjustments with committeddiversification and globalisation game vision. We deem Co. enhances itsexecutions of ROI-driven operations across all business segments. For coregame, we see Co. is streamlining operations in terms of existing titles’ content/pack update, new projects’ development, global studios’ investments, eSportsoperations, organisations’ restructure, etc. by prioiritsing on resources allocationefficiency with consistent game genres’ diversification and geographicalexpansion vision. According to our latest estimates on existing games andpipelines, we uplift our FY2025-27 core online game revenue forecasts by 2-3%to reflect 0-2% rise on PC games and 3% increase on mobile games. While wecut our FY2025-27 non-game revenue forecasts by 7-8%, we significantly raiseour FY2025-27 adj. EPADS forecasts by 7-14% with over 150bps GPM rise anddecreased opex assumptions, especially S&M in FY2025.
　　1Q25: Core game beat with strong cash revenue; OUTSIZED profit.
　　Total revenue grew +7% YoY to RMB28.8bn, 1% above consensus. Core onlinegame grew 15% YoY to RMB23.4bn, 5%/ 2% beat consensus/ BOCIe. PC andmobile game revenue delivered +85% YoY/ -4% YoY respectively, 0%/ 3%ahead of BOCIe. Marvel Rivals, Where Winds Meet, Blizzard games and Naraka:Bladepoint contributed to skyrocketed PC game revenue. GPM expanded bothYoY/ QoQ to 64.1%, 61.8% above consensus. Along with disciplined opexespecially S&M (down -33% YoY/ -4% QoQ), operating profit grew 37% YoYwith 36.2% OPM, significantly beating consensus of 29.2%. Deferred revenueexcluding Youdao was RMB17.0bn (up 20% YoY/ 19% QoQ), leading to +17%YoY/ 30% QoQ cash revenue, in line with BOCIe. Co. has repurchased ~0.4mshares this quarter and has remaining US$3.1bn buyback quota till Jan 2026 byMar 2025 and distributed regular 30% quarterly dividends.
　　Key Risks for Rating
　　Downside risks: i) weak pipelines; ii) weak macro and online discretionaryspending recovery; iii) game regulations; iv) competition; v) destructiveinvestments; vi) dampened partnerships; and vii) ADR delisting.
　　Valuation
　　Maintain BUY and uplift our TP to US$140.0/ HK$220.0 on: i) US$114.0 onunchanged 13.0x FY2025E adj. EPADS of US$8.8 (vs. US$7.6 previously); 2)US$5.0 from stakes in Youdao and Cloud Music; and 3) US$21.0 from net cash.