8% YoY topline and +13% YoY core online game in 3Q25 both missed consensus. Inline RMB9.5b (+27% YoY) adj. net profit was attributable to surprising quarterly record high S&M offsetting investment income. Solid +14% YoY cash revenue met BOCIe’s relatively bullish estimate. We deem Co. is dedicated to enhancing resource allocation efficiency for both game development and operations, focusing on less but most promising new pipelines and key evergreen titles. We see initial success of WWM overseas will gain N-T attraction. Maintain BUY and slightly cut TP to US$170.0/ HK$265.0.
Key Factors for Rating
Committed strategic shifts; WWM overseas N-T catalyst. We deem Co. will consistently streamline its organisational structure and enhance resource allocation efficiency, directing main efforts towards sustaining evergreen titles and nurturing a curated portfolio of high-potential, innovative but fewer pipelines. We view this ongoing strategic shift as driven by Co.’s prudent assessment of both the evolving global game industries and Co.’s own core competencies. We believe the N-T business highlight is WWM’s strong overseas debut on PC and PS5 on 14 Nov, with Steam PCU surpassing 193k within 2 days. We attribute its outperformance to i) gameplay & content: offers a high-quality, quasi-AAA experience that aligns well with Western players’ openworld preferences for free; ii) cultural appeal & marketing: presents an intriguing historical narrative infused with authentic Chinese cultural elements, and leverages regional KOLs to rapidly gain mainstream visibility. Some key areas for future observation include: i) localisation: to fix inconsistencies in UI, voice acting and subtitles, etc.; ii) habit cultivation: to continue educating players on its unique open-world + optional MMO game modes and diverse gameplays; iii) mobile version: commenced pre-registration and set to launch soon; iv) commercialisation: whether content updates can sustain L-T player engagement and convert into spending on cosmetic offerings. Thus, we slightly cut our FY2025-27 total revenue estimates by 1-2% to reflect our latest assessments on dynamic game performances. Our decreased bottom line estimates mainly reflect our increased opex assumption.
3Q25: historical record high S&M led Op miss. Total revenue grew 8% YoY to RMB28.4bn, 3% below consensus. 13% YoY core online game of RMB22.8bn missed consensus/BOCIe by 2%/3%. 64.1% GPM met streets’ expectation. S&M continued to surprise the market, reaching quarterly historical high of RMB4.5bn (+17% YoY). Operating profit grew 12% YoY to RMB8.0bn with 28.3% OPM, missing consensus of 31.3%. RMB9.5bn adj. net profit met consensus mainly benefitted by RMB1.4bn investment income. Deferred revenue excluding Youdao was RMB18.7bn (+27% YoY), leading to +14% YoY cash revenue, in line with BOCIe. Co. has announced to extend its remaining US$3.0bn buyback quota till Jan 2029 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
We roll over to 2026 estimates. Maintain BUY and slightly cut our TP to US$170.0/ HK$265.0 on: i) US$149.0 on 16.0x FY2026E adj. EPADS of US$9.3; 2) US$5.0 from stake in Youdao and Cloud Music; and 3) US$16.0 from net cash.