The performance is in line with the forecast

The company's revenue in 2022 fell 43% to 630 million yuan, falling into the forecast range of 620-640 million yuan; adjusted net profit fell 89% to 46.18 million yuan, falling into the forecast range of 46 to 76 million yuan; adjusted net profit fell 88% to 50.79 million yuan, of which 2H22 achieved a profit of 126 million yuan.

Development trends

A new breakthrough was achieved in overseas layout in the second half of the year, and “The Strongest Snail” was launched in Japan to promote a positive cycle. The company's 2H22 revenue increased by 6%/35% over the same month-on-month period. According to the announcement, the Japanese edition of “The Strongest Snail” had a total regional turnover of 136 million yuan from June to December 2022, boosting the share of overseas revenue for the whole year to 25%. Domestic products have also maintained long-term operations. We believe that the first half of the year was influenced by the product cycle and was under relative pressure. With the launch of new overseas versions of classic games in the second half of the year, regional breakthroughs and revenue growth were achieved, and performance entered a positive cycle.

Special tax changes affected profits throughout the year. Marketing investment was recovered in the second half of the year, R&D and construction continued relatively, and losses were reversed in the second half of the year. In terms of taxes, corporate income tax expenses in 2022 were $32.88 million (income tax benefits of $32.63 million in 2021). The company stated that it was mainly due to the increase in the applicable income tax rate from 0% to 15% by one of its subsidiaries and the transfer back of some of the deferred tax assets previously confirmed during the reporting period. In terms of costs, the company's 2H22 marketing/R&D rate was 16%, the marketing rate was reduced by 1ppt/41ppt, the R&D fee rate was reduced by 5 ppt, and R&D expenses rose slightly by 4% over the same period, maintaining steady R&D investment. Looking at marketing rates, we believe that the company's investment in the early stages of the game's launch was gradually recovered, driving 2H22 to achieve adjusted net profit of 126 million yuan.

The stock of version number products is abundant, testing is progressing in an orderly manner, and there are layouts at home and abroad. The company launched its self-developed game “Project Enchanter” in mainland China in January 2023 (with a turnover of 25.5 million yuan in the first two months, we judge that the product uses a precise distribution model with a better profit margin) and launched “The Strongest Snail” in Thailand. The company also stated that “The Strongest Snail” is expected to be launched in North America within this year. In terms of new games, according to the announcement, the company expects to launch 1 self-developed product and 5 imported authorized products in 2023, including: “Time Travel Service” (self-developed rogue-like RPG, which has already started photon suit testing. The company expects 2H23 to be launched, which already has a version number), “Sword of Fury: Sword of Fury” (intermodal transport with mobile games, story card mobile games, is ready to start the TapTap test. The agency is expected to launch in June 2023), “Makka Shoujo: Memories of Sakura” (the company expects to launch in June 2023), “Makka Shoujo: Memories of Sakura” (the company expects to launch in June 2023), “Makka Shoujo: Memories of Sakura” (the company expects to launch in June 2023), “Makka Shoujo: Memories of Sakura” (the company expects to launch in June 2023) (Mobile game for women), “Blade Heart 2 ” (agent/parkour/existing version), “Knight RPG” (agent/ACT RPG), and “Super Cat Project” (agent/leisure/existing version) products. Looking ahead to 2024/2025, the company has 3/3 games in reserve, 2 of which are newly licensed games. We recommend continuing to pay attention to the fundamentals and valuation flexibility brought about by the new product testing and launch process.

Profit forecasting and valuation

Keep the non-IFRS net profit forecast unchanged. The current stock price corresponds to the 2023/2024 8/6 price-earnings ratio of non-IFRS. Maintaining an outperforming industry rating, the target price was raised 35% to HK$7 due to the upward shift in the industry valuation center, corresponding to the 9/7 times non-IFRS P/E in 2023/2024, with an upward margin of 17%.

risks

The macroeconomic downturn affects entertainment spending, industry policy risks such as version distribution, etc., a single game relies on risk, game launch progress or flow falls short of expectations, and liquidity risks.