爱奇艺：Margin surprise on higher efficiency

Investment Rating - Maintain BUY with a target price of US$8.60, representing a 48.5% upside from the current price of US$5.79 [5][3]. Core Insights - The company reported a strong margin surprise in 1Q24, with adjusted net profit at RMB844 million, which is 91% above consensus expectations, and revenue 1% above consensus [3][10]. - For 2Q24, revenue is expected to decline by 1% year-over-year, with subscription revenue down 5% and advertising revenue up 7%, supported by a rich content pipeline [3][20]. - The management is optimistic about achieving a full-year operating profit target of RMB5 billion for FY24, backed by improved operational efficiency and a robust advertising strategy [3][20]. Financial Performance - 1Q24 revenue was RMB7,927 million, down 5% year-over-year, but 1% above consensus estimates [10][11]. - Adjusted operating profit margin reached 14%, exceeding estimates by 3 percentage points due to enhanced content strategy and operational efficiency [3][10]. - Operating cash flow for 1Q24 was RMB937.8 million, indicating strong cash generation capabilities [3][10]. Revenue Breakdown - Membership services revenue declined by 13.5% year-over-year in 1Q24, while online advertising revenue grew by 5.6% year-over-year, driven by performance-based ads [11][12]. - The company anticipates continued growth in advertising revenue, particularly from sectors like food & beverage and telecommunications, as traditional spending recovers in 2Q24 [3][20]. Future Outlook - The company has a strong content pipeline with anticipated releases such as "Fox Spirit Matchmaker" and "Lost in the Shadows," which are expected to drive subscriber engagement and revenue growth [3][20]. - Long-term forecasts for FY24-26 earnings remain unchanged, with expectations of continued margin improvement and operational efficiency [3][20]. Valuation Metrics - The company is projected to achieve revenue of RMB34,663 million in FY24, with adjusted net profit expected to reach RMB3,714 million [20][18]. - The P/E ratio is projected to decline from 11.0x in FY24 to 9.1x in FY26, indicating potential for value appreciation [22][23].