The performance was in line with the forecast, and the dividends exceeded market expectations

The company announced its 2022 results: revenue fell 6% to 1.52 billion yuan; profit fell 91% to 25.11 million yuan during the year, close to the top of the forecast range, with 2H22 reaching 100 million yuan. The total profit and overall income for the period realized in 2022 (that is, return to the mother) was 58.03 million yuan (the exchange difference positively affected 26.52 million yuan). In terms of dividends, the company plans to distribute a 2022 dividend of HK$0.06 per common share (a total of $120 million), a dividend payment rate of 465% (based on profit during the year), and a dividend rate of 6.2% (based on 2023/03/21 closing price).

Development trends

“Ling Yunuo” has performed steadily throughout the year, and the stock product matrix has been operating for a long time. The company achieved revenue of 7.0 billion yuan in 2H22, a decrease of 11%/15% over the same period. Among them, the company's new 2022 game “Ling Yunnuo” ranked overall in the 50-80 iOS bestseller list for each quarter. In terms of stock products, according to Qimai, “Floating Is a Song” (launched at the end of 2019) was less than 50 iOS bestsellers overall in each quarter of 2022, with an average of 20/29 in 2020/2021. We estimate that the current monthly turnover of “Fusheng Sheng Sheng as a Song” remains at the level of tens of millions of yuan, while other products such as “The Legend of Xi Fei Q” also maintain a steady monthly revenue contribution.

Marketing expenses were well controlled in the second half of the year, and product profits were gradually released. The company's 1H/2H22 sales rate is 57%/25% respectively. We believe that as the flow of new products enters a relatively steady range, the company adjusted its product distribution strategy and reduced “Ling Yunnuo” marketing expenses, so that the overall sales rate returned to the normal range of history. Corresponsibly, early marketing campaigns were also gradually recovered to help release profits in the second half of the year. In terms of R&D expenses, the company's R&D rates for 1H/2H22 were 20%/27% respectively, and 2H22 R&D expenses increased by 1%. Overall, it maintained relatively healthy and continuous R&D investment to support new product development and iterative updating of stock product versions. At the same time, the company stated that it will accelerate research breakthroughs in cutting-edge technologies such as AIGC, reduce costs and increase efficiency in art production, plot planning, game interaction, etc., and promote the improvement of user experience.

The pace of the annual product launch did not change. “Durara” went live on 1Q23, and the “Fuzeng” second-generation product is ready to be launched. Since its launch, the company has maintained the overall pace of one product per year, and has continued to cultivate women on the racetrack. Looking at the 1H23 dimension, “Durara's Rise to Work” was also launched in January, shifting from an ancient theme to a modern theme, achieving a breakthrough.

According to Qimai, the average daily ranking of “Durara's Promotion” domestic iOS bestseller list rose from 125th place in the first month to 82nd place in the following month. Currently, it continues to climb, and we think it is expected to contribute to the company's performance this year.

Looking at the second half of the year, the company reserves various products such as “Fusheng Memories” (version number, “Fusheng” second generation. The company said that R&D progress exceeded expectations, or is expected to be launched on 4Q23), “Code WX” (2.5D martial arts strategy category), and “Code PE” (development of female characters with European royal themes). Some products are also expected to achieve new breakthroughs in the company's current competitive circuit, laying a good foundation for the company's growth in 2024 and beyond.

Profit forecasting and valuation

As product performance remains to be seen, net profit for 2023/24 was lowered 15%/9% to 18/320 million yuan. The current stock price corresponds to 10/5 times P/E of 2023/24. Maintaining an outperforming industry rating, the target price was lowered 14% to HK$1.2 (12x target P/E in 2023) due to profit forecast adjustments, with room for increase by 24%.

risks

The progress or performance of the launch of new games fell short of expectations. Macroeconomics affected entertainment consumption expenditure, industry regulatory policy risks, and liquidity risks.