Key points of investment:
The company's gaming business is expected to recover in '23. The pressure on the company's 22-year performance was mainly due to 1) Affected by the epidemic, etc., the company's new product development efficiency has been reduced, the launch time for new products has been delayed, and fixed R&D costs have increased; at the same time, regulatory policies have become stricter, and the game version distribution progress has affected the launch of new domestic products to a certain extent; 2) Competition in the domestic game market is fierce, and product operating costs have increased due to increased customer acquisition costs for the company's newly launched products; 3) Over the past few years, the company's overseas game business has gradually shifted from game agency development to product self-development, since overseas self-developed products require a long period of incubation and polishing in the early stages. The phenomenon of large R&D investment and long cycles over a period of time has led to a decline in profits in the overseas game business sector.
4) The company plans to accrue partial impairment provisions and fair value change gains and losses on some invested companies and other assets in '22. The total amount of impairment provisions and goodwill impairment provisions is 6.3-8.3 billion yuan. The domestic game business is expected to recover in '23. 1) Beginning at the end of the year 22, game versions will be approved at an accelerated pace, and the launch of the company's new game products is expected to accelerate. 2) The company implemented overall personnel structure optimization in '22, and the cost reduction effect is expected to be reflected in '23. 3) The company has rich IP reserves, including “Legend of Blood”, “Dragon Valley”, “World of Legends”, “Rainbow Island”, “Age of Heroes”, “Fengyun”, “No Moon”, “Warrior of Light”, etc. The product has a long life cycle, high user stickiness, and a sustainable and stable contribution of revenue to the company. Among them, “Legend” IP, as an influential category IP, has accumulated a broad user base and good reputation through more than 20 years of operation, and has strong sustainable development capabilities.
Overseas interactive self-research capabilities have improved. After nearly four years of incubation and accumulation, self-developed games have accounted for more than 70% of overseas revenue, and have maintained double-digit growth in recent years. “Family Farm Adventure (Family Farm Adventure),” a new work in the “Family Farm” series of its own IP, has performed well overseas. In 2022, the card-placing mobile game “Valor Legends: Eternity” under DianDian Interactive also became a phenomenal product. In addition, two new games, “FrozenCity” (Frozen Age) and “Whiteout Survival” (Frost Apocalypse) developed independently, are growing strongly.
Follow IDC's business progress. The company joined hands with strategic shareholder Tencent to enter the IDC business in 2020, and the Tencent Yangtze River Delta Advanced Computing Center and Ecological Industrial Park project in Songjiang, Shanghai, which participated in the investment, has gradually been put into operation. The company integrated the Shenzhen data center project, the Yangtze River Delta data center project and other related businesses, and established the “Cloud Data Division” to unify the planning, operation, management and expansion of Internet data centers and data security services. In January '23, the board of directors of the company deliberated and passed the “Proposal on Holding Subsidiaries' Investment in Shenzhen Data Center Projects” and the “Proposal on Holding Subsidiaries Applying for Comprehensive Credit Lines from Financial Institutions for the Construction of Shenzhen Data Center Projects”, agreeing to the company's investment in the Shenzhen data center project.
Investment analysis opinion: Considering that the game industry was under pressure in '22 and the company experienced significant impairment, we lowered the company's net profit forecast for 22 to 7.053 billion yuan (the original forecast was 4.925 billion yuan of net profit to the mother). The net profit forecast for the new 23-24 years was 1,730/2,274 billion yuan. The current price corresponding to PE for 23-24 years was 29/22 times, respectively. Considering the gradual recovery of the company's game business and IDC expected to become the second curve of development, the company's 24-year target PE was given 25 times (the IDC business in '23 was still in the investment stage and had an impact on performance, so the 24-year profit forecast was used; reviewing game stock valuations, the rise of Forward PE to 25-40x was mainly driven by factors such as cloud gaming, the ByteDance concept, the metaverse, etc.; currently at the beginning of the innovation cycle of AI+ games, the Game+IDC two-wheel drive Century Huatong valuation is expected to be repaired), the target market value is expected to be repaired) At 56.85 billion yuan, maintaining the “increase in holdings” rating.
Risk warning: Risk of impairment of goodwill; risk of game project delayment/new game product performance falling short of expectations; investors are invited to pay attention to receiving a regulatory letter from the Shenzhen Stock Exchange due to share repurchases.