1H21 performance meets the forecast
The company announced 1H21 results: revenue was 554 million yuan, down 8.0% from the same period last year; loss during the period was 85.8 million yuan, down 89.1% from the same period last year; adjusted net loss was 47.1 million yuan, down 131.1% from the same period last year, falling into the profit warning and adjusted net loss range of 4500-55 million yuan, mainly due to the lacklustre performance of new products that have been launched, delays in products waiting for launch and continuous investment in R & D and marketing.
Development trend
The performance of the new tour "Dream New World" is not as good as expected, and "under Hongtu" is relatively stable. The company's 1H21 realized operating revenue of 554 million yuan, down 8.0% from the same period last year, mainly due to: 1) the natural decline of old games such as "Dragon Raja"; 2) the new tour "Dream New World" launched in January 2021 failed to meet expectations, and its contribution was limited. However, the overall performance of the SLG mobile game "under Hongtu" launched by the company in 2020 is stable. According to Qimai data, the daily average ranking of the best-selling ios games under Hongtu in the first half of the year is basically less than 100th, making a stable contribution to the company's performance. In addition, according to Qimai data and AppAnnie, "under Hongtu" landed in Japan in January and Hong Kong, Macao and Taiwan in China in April (Hong Kong, China ranked 30th on the daily best-selling list of ios games in Hong Kong, China from April to June), and will release an English and Korean version on 2H21. We believe that the steady flow of the mobile game under Hongtu reflects the success of the company's product development from MMO to SLG, and it is expected that the game will continue to contribute with the launch of the new season and the launch of multilingual versions. We continued to increase investment in research and development, and marketing expenses increased year on year. The company's 1H21 R & D expenditure of 337 million yuan (YoY+48.2%) is mainly due to the continuous R & D team building and the introduction of high-end technical personnel in the first half of the year, with an increase of 61 to 1105 R & D personnel compared with the end of last year. At present, the company has set up offices in Beijing / Changchun / Chengdu / Shanghai (opened in July 2021) to provide a good office environment for R & D, distribution and art talents to encourage content creation. In terms of sales expenses, the company's 1H21 sales expenses also increased by 61.9% to 160 million yuan, which we expect to be mainly due to the brand marketing and advertising expenses invested by "under Hongtu" in Japan.
"the Heart of Noah" is ready to be launched, and there are rich reserves for multi-category new tours. The company said that the first test of the Open World MMO "Heart of Noah" (which already has a version) ended on July 22nd, and 2H21 is expected to be launched. With abundant game reserves in the year after next, the company expects that female "Project A" is expected to be released by Chinese mainland in 2022, MMO "Project B" is expected to be released globally in 2022, and SLG "Project C" is expected to be tested overseas by 2H21, in addition to other new games to be launched. We believe that the company is in the short-term product research and development period, the performance pressure is greater, but the market expectation is more sufficient; pay attention to the profit increment brought by the launch of new products in the later stage.
Profit forecast and valuation
Taking into account the persistence of R & D investment and the postponement of new products, we reduce the company's adjusted net profit by 76.7% in 2021 / 2022 to 0.41 / 550 million yuan. The current share price corresponds to 12.7 times non-P / E in 2022. Maintain the outperform industry rating, taking into account the industry valuation center has a certain downward shift, cut the target price by 35.7% to HK $11.77, corresponding to 15.0 times the upside space for deducting non-PE,38.0% in 2022.
Risk
The progress of the launch of new games is not as expected; the relationship with third-party publishers has deteriorated; and overseas business is not as expected.