Although 9% YoY topline and RMB9.1bn (+30% YoY) operating profit in 2Q25 miss consensus by 2% and 1% respectively, solid RMB21.2bn cash revenue (+20% YoY) beat our forecast by 3%. We deem this reflects Co.’s successful summer campaigns of various key franchises facilitated by its strong operational capabilities. We deem Co.’s streamlined major adjustments in terms of game development (prioritises quality over quantity now) and operations especially marketing and in-game promotions have been completed. Core global game vision and capabilities are intact. Maintain BUY and slightly uplift our TP to US$153/HK$240.
　　Key Factors for Rating
　　Rejuvenated existing game portfolios; Improved efficiency. We deem Co. prioritises grossing of game portfolios across game genres, geographies and terminals. We see Co. is going through a successful summer campaign for its various key existing franchises such as FWJ, Eggy Party, Where Winds Meet (WWW), Naraka, Justice, identity V, Marvel Rivals, etc. through strong operational capabilities (content, game mode, characters and skins updates, IP collaborations) and increased but disciplined marketing and in-game promotions. We expect Co. to prioritise quality over quantity for game development and will target at cross-terminal global launch with its solidified innovation capabilities. Near to midterm pipelines include Destiny Rising overseas launch and Diablo II domestic launch in end Aug 25, Wildgate domestic launch in Sep 25, Marvel mystic mayhem domestic launch in 4Q25, WWW console overseas launch before end 2025 and Sea of Remnants in 2026.
　　Key FY2025-27E forecasts changes: we nudge up our pure game revenue by 2% to mainly reflect increased mobile game revenue forecasts due to solid existing key titles, as well as our updated pipeline schedules. We significantly increase our opex assumptions by 6-8%, especially raise our S&M estimates by 10-14%, leading to our 2-5% cut on adj. EPADS.
　　2Q25 not that bad; surprising S&M; strong cash revenue. Total revenue grew 9% YoY to RMB27.9bn, 2% below consensus. Core online game grew 15% YoY to RMB22.1bn, 3%/1% below consensus/BOCIe, mainly driven by Marvel Rivals, Where Winds Meet, Blizzard games, Identity V and FWJ mobile. GPM further expanded both YoY/QoQ to 64.7%, exceeding 63.4% consensus. Despite relatively “surprising” S&M of RMB3.6bn (up +2% YoY/+33% QoQ), operating profit grew 30% YoY with 32.5% OPM, in line with consensus. Deferred revenue excluding Youdao was RMB16.1bn (+28% YoY), leading to +20% YoY cash revenue, 3% beat BOCIe. Co. has repurchased c.0.5m shares this quarter and has US$3.0bn buyback quota remaining till Jan 2026 by June 2025 and distributed regular 30% quarterly dividends.
　　Key Risks for Rating
　　Downside risks: i) weak pipelines; ii) weak macro and online discretionary spending recovery; iii) game regulations; iv) competition; v) destructive investments; vi) dampened partnerships; and vii) ADR delisting.
　　Valuation
　　Maintain BUY and uplift our TP to US$153/HK$240 on: i) US$131.0 on 15.0x FY2025E adj. EPADS of US$8.7; 2) US$7.0 from stakes in Youdao and Cloud Music; and 3) US$15.0 from net cash.