1H21 performance is lower than we expected.
The company announced 1H21 results: revenue was 833 million yuan, down 20.7% from the same period last year; profit during the period was 130 million yuan, down 20.1% from the same period last year. The company's performance is lower than we expected, mainly due to the new travel is not as expected, the increase in R & D investment and so on.
Trend of development
Xinyou is not as expected, and the persistence of "floating Life for Qing Song" is better. The company's 1H21 revenue decreased by 20.7% to 833 million yuan compared with the same period last year, of which the revenue from self-research and spontaneous games was 807 million yuan. We believe that the company's revenue in the first half of the year is mainly due to the steady contribution of "floating Life for Qing Song". According to Qimai data, "floating Life for Qing Song" iOS bestseller list 1H21 ranked 28th on average, compared with 22nd in the same period last year, with long life cycle characteristics. In terms of new travel, we judge that the contribution of "No White in this Life" launched in April is relatively limited; other old games decline naturally. In terms of geographical distribution, overseas revenue increased by 47.8% to 235 million yuan compared with the same period last year, among which, according to the company announcement, "floating Life for Qing Song" actively went out to explore, and in the first half of the year, the highest ranking of iOS games in Hong Kong, Macao and Taiwan reached 7-2-9 respectively.
The continuous R & D construction and the investment of new tourist volume lead to the pressure on profits. The company's 1H21 R & D expenses increased by 36.3% to 178 million yuan compared with the same period last year, and R & D fees increased by 8.9ppt to 21.40% year-on-year, mainly to support the increase in personnel costs for new game development and old game upgrades, as well as the increase in share-based R & D personnel compensation expenses. We believe that the company continues to expand its R & D team, increase the salary and expenditure of R & D personnel, and advance R & D construction in an orderly manner. The sales expense rate increased by 1.7ppt to 33.7% compared with the same period last year; we judge that it is mainly due to the large amount of promotion expenses in the early stage of the new tour "this Life without Bai", while the average performance of the game partially offset the profits of "floating Life for Qing Song" and old products, putting pressure on the profit end.
The track innovation breakthrough, the product line is relatively clear. On the one hand, the company's antique track products are full, around the original IP to form a unique product style. We judge that products such as "Ling Yun Nuo" (with a version number, AppStore has opened an appointment) and "code name: FS2" (the second generation of the IP series of "floating Life for Qing Song") are expected to be launched one after another. On the other hand, the company broke through the original antique track and created a new product line, in which women with modern workplace themes offered a trial to RPG's new tour "du Lala's Promotion" at ChinaJoy in July this year. As of August 31, 2021, the official website booked more than 160000 people. In addition, the company continues to develop multi-category games such as "code name: MS". In terms of agency products, the idol simulation mobile game "code: W" has been tested overseas. We expect that the stability of the revenue side will continue to increase as the diversity of the company's product line increases.
Profit forecast and valuation
Considering that the launch of new games is lower than expected, the net profit of 2021 / 2022 will be reduced by 47.6% of net profit of 37.4% to 313 million yuan / 447 million yuan. The current share price corresponds to 8.5x / 5.9x PE in 2021 / 2022. Maintain outperform industry rating, due to profit forecast adjustment, cut the target price 37.4% to 2.39 Hong Kong dollars, corresponding to 10 times 2022 PE, potential 68.3% upside.
Risk.
Industry regulatory policy risks; online games and new games do not perform as expected; liquidity risk.