Youdao(US:DAO) HTSC·2025-11-21 01:43Investment Rating - The investment rating for the company is maintained as "Buy" with a target price of $12.46 [1][4]. Core Insights - The company's revenue for Q3 2025 was 1.63 billion RMB, showing a year-over-year increase of 3.6%, driven primarily by accelerated growth in the advertising business, particularly benefiting from the gaming industry [1][2]. - The company achieved an operating profit of approximately 28.27 million RMB in Q3, slightly exceeding expectations, and has reported profitability for five consecutive quarters, with a year-to-date operating profit increase of 149.2% [1][2]. - The advertising service revenue reached 740 million RMB in Q3, reflecting a year-over-year growth of 51.1%, significantly surpassing previous expectations [2][4]. Revenue and Profitability - The Q3 revenue was primarily driven by advertising services, with the gaming sector being a major contributor, while learning services revenue was 643 million RMB, down 16% year-over-year [2][4]. - The core product, Youdao Lingshi, saw sales growth of over 40% year-over-year, attributed to strong summer performance and improved student exam results [2][4]. - AI subscription service revenue exceeded 100 million RMB, with a year-over-year growth of over 40%, mainly due to upgrades in Youdao Dictionary's AI simultaneous interpretation [2][4]. Strategic Focus - The company is increasing its investment in core business areas to support long-term sustainable growth, particularly in learning services and advertising [3][4]. - Collaborations with Google and TikTok, along with the issuance of gaming licenses, are expected to provide significant customer acquisition opportunities for the advertising business [3][4]. Financial Forecast and Valuation - The company anticipates Non-GAAP net profits of 147 million RMB, 318 million RMB, and 417 million RMB for 2025E, 2026E, and 2027E respectively, with adjustments reflecting strategic focus on core business investments [4][11]. - The SOTP valuation method assigns a PE of 16.59x for K12 business and 21.94x for smart hardware business, with an overall target price of $12.46 [4][11].