Services activity growth continues at start of second quarter

In April, the Caixin China General Services PMI dropped by 0.3 points from the previous month to 52.5. The index remained in expansionary territory for the 16th straight month. This trend was not consistent with the Services PMI released by the National Bureau of Statistics. The Services PMI released by the National Bureau of Statistics was at 51.4 in April, which was 0.3 points higher than March’s level, hit a record high since March 2023. Improved market demand drove a continuous increase in supply. Business activity and total new orders both grew for the 16th straight month, with the latter increasing at the fastest pace since May last year, indicating a solid resurgence in demand. Like the previous two months, the sector’s labor market remained in contraction despite an overall market rally. Businesses remained reluctant to fill vacancies left by departures. The gauge for employment dropped from March, staying in negative territory for the third straight month.

Both input costs and prices charged by service providers increased. Input costs rose on increased prices for raw materials, labor and energy, which were partially passed onto consumers. Although below its historical average, the gauge for future activity expectations was the highest in four months. Surveyed companies expressed confidence in the market prospects for the coming year. In terms of the Hong Kong stock market, the Hang Seng Index maintained a steady gain and is expected to maintain an upward momentum in the short term, and fluctuate between 18,400-19,500 points.

In terms of industry, benefiting from the good performance in Q4, the stock prices of technology stocks have risen strongly, and investors can pay attention to related companies.

Bilibili (9626.HK)’s total net revenues in FY23 amounted to RMB22.5 billion, representing an YoY increase of 3%. In terms of business, revenues from advertising were up 27% YoY to RMB6.4 billion. Revenues from Value-added services stood at RMB9.9 billion, up 14% YoY, led by an increase in revenues from live broadcasting and other value-added services. Revenues from mobile games dropped by 20% YoY to RMB4.0 billion, mainly attributable to fewer new game launches as well as lower revenue contributions from certain games, while revenues from top-performing legacy games, like Azur Lane and FGO, remained relatively stable in 2023. Revenues from IP derivatives and others (formerly known as E-commerce and others) amounted to RMB2.2 billion, a YoY decrease of 29%, mainly attributable to a decrease in revenues from e-sports copyright sublicensing and IP derivatives sales.

Bilibili focused on business operation efficiency, resulting in expanded gross margins and bottom-line improvement. Gross profit reached RMB5.4 billion, a YoY increase of 41%. Gross profit margin increased to 24.2% from 17.6% in 2022. Net loss was RMB 4.8 billion, narrowing by 36% YoY. It is recommended to buy at HK$105.0, target at HK$122.0, and stop loss at HK$101.0.

NetEase(9999.HK)performed well in Q4, with improved profitability. Revenue amounted to RMB27.14 billion, a YoY increase of 7.04%. The profitability improved significantly YoY, with net profit of RMB6.58 billion, a YoY increase of 66.52%. The growth is mainly due to the excellent performance of “Justice” since its launch in June 2023, the stable growth of “Eggy Party”, and the continued improvement of GPM. The gross profit margin of Games and related value-added services increased to 69.50% from 59.10% in 4Q22.

The mobile game business maintained high growth. Net revenues from games and related value-added services amounted to RMB20.9 billion in 4Q23, up 9.6%. Of which, mobile game revenue reached RMB14.98 billion, a YoY increase of 28.83%. Eggy Party’s broad popularity has engaged over 500 million cumulative registered players since its launch in 2022 and made a significant breakthrough of 40 million daily active users during the Lunar New Year. Justice franchises reached a new milestone of 100 million active users with densely packed content and widely embraced in-game events for players. It is recommended to buy at HK$149.0, target at HK$173.0, and stop loss at HK$143.0.