Research purpose: Recently, we visited the company's management on issues such as Zhongqingbao's business situation and future development strategy.

Key investment points: Achieving EPS of 0.07 yuan in the first half of the year fell short of market expectations. The company achieved operating income of 43.69 million yuan in the first half of 2011, an increase of 20.58% over the previous year; the company achieved operating profit of 1,7742 million yuan, a year-on-year decrease of 82.66%, and achieved net profit attributable to shareholders of listed companies of 10.408 million yuan, a year-on-year decrease of 30.60%, and achieved EPS 0.07 yuan in the first half of the year, lower than market expectations. Cost increase and gross margin decline The main reasons for the decline in the company's operating profit and net profit include (1) the company invested a large amount of advertising fees and other costs and expenses in the launch of new products, but the revenue from the new products was not quickly reflected during the reporting period; (2) the start-up expenses and daily operating expenses of many newly established holding subsidiaries and wholly-owned subsidiaries increased operating profit losses, causing the company's consolidated operating profit data to drop drastically; (3) the original preferential value-added tax policy remained unchanged after the expiration of the report, but the relevant tax refund declaration was delayed, causing the company's VAT return to lag behind; The gross margin of MMORPG online games was 76.06%, gross margin fell 9.81% year on year, web games and other businesses were 1075.56%, and gross margin was 88.67%, down 10.16% from the previous year; the overall gross margin level was 78.94%, down 7.23 percentage points from the previous year. It is expected that the launch of new games will boost the company's performance growth. In addition to the red online games when the parent company was listed, the game product line built by the company has entered segments such as web games, mobile games, and community games through continuous acquisitions. Since mobile games and community games are currently still in the exploration stage, it is difficult to contribute to performance in the short term, the company's short-term performance growth is mainly due to the operation of the large-scale games “Xuanwu” and “Hot Blood World” and web games newly invested in the first half of the year; in the future, game projects invested and acquired by the company will continue to be launched, and it is expected that fund-raising projects will also be launched at the end of this year and next year. It will improve the company's performance. There is uncertainty about the development of e-commerce business. The company invested 100 million yuan to set up a subsidiary. The e-commerce department of China Pay obtained a corporate business license in August. The company hopes to get involved in the e-commerce industry to directly serve gamers, save channel distribution costs by promoting game point cards in the short term, and hope to be able to get involved in e-commerce in other industries in the long term; since no third party payment license approved by the central bank has been obtained yet, there is uncertainty about the future development of the company's business.

Valuations and investment suggestions are that the company will launch “War of Resistance 2” and various game products in the second half of the year. Since game product profits will be realized after users have accumulated to a certain scale, the company will also carry out large-scale publicity expenses to promote games. The company expects the performance of the second half of the year to be similar to the first half of the year. We recommend investors to pay close attention to the company's game promotion and performance. The price-earnings ratio corresponding to the company's current stock price is 65 times. We will cover it for the first time, without rating it.

Key concerns Stock price catalysts: the launch of new games boosts players; value-added business development increases the ARPU value of users. Risk warning: payment license approval risk; game development risk; industry policy risk.