The company's revenue grew throughout the year, and changes in the business structure led to a decline in profits. Looking ahead, with improvements in domestic terminal consumption and the launch of new games, the company's game business is expected to recover rapidly. Looking at the education business, the overseas education industry is affected by macro factors and is still at a low point in the short term, but under the global education informatization trend, I am optimistic about the long-term growth of the company's education business. Based on this, we lowered our 2023-24 EPS forecast to HK$2.22/2.40 (the original forecast was HK$3.82/4.26), and the new 2025 EPS forecast was increased to HK$2.68. We gave the company 10 times PE in 2023, corresponding to the target price of HK$22, maintaining the “buy” rating.
Revenue increased 11.8%, and changes in business structure led to a decline in profits. The company announced its full-year results for 2022. In 2022, the company achieved revenue of 7.866 billion yuan/ +11.8%, and net profit of 834 million yuan/ -21.5%. In terms of profitability, the company's gross margin in 2022 was 54.9% /-9.4pcts, mainly dragged down by an increase in the share of education business with low gross margin and a decline in the game business with a high gross margin. In terms of expenses, the company's R&D/sales/management expenses ratio was 15.6%/12.0%/12.4%, respectively, and the year-on-year change was -0.9/-1.6/-1.2pcts.
Gaming business: The mobile game business is resilient. Mobile gaming revenue declined due to macro factors, and overseas business maintained steady growth. In 2022, the company's game business achieved revenue of 3.43 billion yuan/ -5.8%, accounting for 43.6% of total revenue. The gross margin was 95.6% /+0.2pct, which remained relatively stable. The game development/sales/management expense ratio was 22.40%/12.14%/8.90%, the year-on-year change was +4.34/+0.07/-0.26pcts, and operating profit fell -14.1% year on year to 1,821 billion yuan. Specifically: 1) The company's mobile game revenue was 577 million yuan/ -0.2%, and the decline in the domestic mobile game market showed strong resilience; 2) Mobile gaming revenue affected by poor consumption fell -6.9% year-on-year to 2.8 billion yuan; 3) Overseas business revenue was 540 million yuan/ +6.5%, mainly driven by a sharp rise of 48.5% in the company's “Conquer” IP overseas business revenue. Outlook: The company will step up research and development efforts and expand its reserves of new games. In 2023-2024, the company expects to release five new games based on the “Magic Domain” IP; in addition, the company will also launch new games and new IPs for the “Oath to End” and “Hero Blade” IPs.
Education business: Revenue increased by 34.2%, operating losses narrowed, and Promethean maintained its leading position. The company's education business achieved revenue of 4.34 billion yuan/+34.2% in 2022, accounting for 55.1% of total revenue. The gross margin was 23.2% /-7.6pcts. The decline was mainly due to: 1) the impact of tariffs and exchange rate fluctuations; 2) the sale of old products at reduced prices after the introduction of new products. In terms of expenses, the R & D/sales/management expenses ratio for education was 10.29%/12.27%/8.93%, a year-on-year decrease of -5.22/-4.14/-1.93pcts, and operating losses under optimized cost structure were 299 million yuan/a year-on-year decrease of 27.4%. The subsidiary Promethean maintains the leading position in global sales (excluding China). Interactive shows that tablet shipments exceeded 253,000 units/ +37.5%. Excluding the impact of tariffs and foreign exchange, Promethean's gross margin was 30.3% /-2.4pcts. Prospects: 1) The company is actively promoting projects in emerging market countries. Currently, the payment pilot program has entered the second phase, and commercial deployment is expected to be carried out in 2023. 2) In the Chinese market, as of March 2023, the total number of registered users of the “National Smart Education Platform for Primary and Secondary Schools” developed and built by the company had exceeded 77 million. 3) Furthermore, with the increase in the penetration rate of interactive tablet classrooms in the global K12 market, large-scale expansion of subscription value-added services and SaaS applications is expected to begin.
Risk factors: macroeconomic pressure; game development falling short of expectations; rising raw material prices; changes in overseas education policies; orders falling short of expectations, etc.
Profit forecasting, valuation and ratings: The company's revenue grew throughout the year, and changes in the business structure led to a decline in profits.
Looking ahead, with improvements in domestic terminal consumption and the launch of new games, the company's game business is expected to recover rapidly. Looking at the education business, the overseas education industry is affected by macro factors and is still at a low point in the short term, but under the global education informatization trend, I am optimistic about the long-term growth of the company's education business. Based on this, we lowered our 2023-24 EPS forecast to HK$2.23/2.48 (the original forecast was HK$3.82/4.26), and the new 2025 EPS forecast was increased to HK$2.57. Referring to the 2023 valuation levels of comparable companies in the education industry (22 times PE of Shiyuan Shares and 16 times PE of Kangguan Technology, all of which are Wind's expectations) and the 2023 valuation levels of comparable companies in the game industry (Century Huatong 9 times PE, Perfect World 17 times PE, all of which are Wind's consistent expectations), the company was given 10 times PE in 2023, corresponding to the target price of HK$22, maintaining the “buy” rating.