Event: The company released its 2020 mid-year report. 1H20 achieved operating income of 926 million yuan, an increase of 33.0% over the previous year; realized net profit of 443 million yuan, an increase of 110.1% over the previous year; and realized net profit after deducting non-return mother to 269 million yuan, an increase of 10.1% over the previous year. Among them, 2Q20 achieved operating income of 517 million yuan, an increase of 51.9% over the previous year; realized net profit of 349 million yuan, an increase of 1337.9% over the previous year; and realized net profit of 180 million yuan, an increase of 93.4% over the previous year. Driven by the impressive performance of overseas core games and large fair value variable earnings, the company's revenue and net profit for the first half of the year exceeded market expectations. Key investment points: The overseas launch of core products has pushed revenue beyond expectations, and gross margin performance is steady. Although the company had few new products in the first half of the year, on the one hand, the explosion of online traffic reversed the downward trend in the flow of key old games, which increased compared to the end of last year; on the other hand, after “One Punch Man: The Strongest Man” was launched overseas, it brought a significant increase in turnover (about 400 million in the first half of the year) and gradually received revenue confirmation in Q2 (due to delays). 2Q20's revenue increased by more than 50% year on year. The company's gross sales margin for the first half of 2020 was 75.42% (yoy+16.6pct), mainly due to the company's implementation of the new revenue guidelines to adjust promotion fees from main business costs to sales expense accounting. Looking at a single quarter, the Q2 gross sales margin was 75.86%, up 1pct over the previous month, and the performance was steady. Expenses are properly controlled, and profit and loss from changes in fair value account for a high proportion of total profit. 1) In terms of cost ratio, the company's sales expense ratio in the first half of the year was 19.99% (yoy+17.96pct). On the one hand, it was due to changes in the way promotion expenses were confirmed, and on the other hand, increased overseas promotion in the first half of the year, but Q2 promotion declined and entered the payback period; the management cost rate was 4.58% (yoy-2.15pct), and the R&D cost rate was 19.72%. Basically, it remained stable, and the cost control was proper. 2) In terms of cash flow, the company's net operating cash flow in the first half of the year was 230 million yuan (yoy +69.1%), of which Q2 net operating cash flow was 210 million yuan (+59.6% over the same period), which matched well with Q2's net profit deducted from net income (180 million yuan). 3) In terms of non-recurring profit and loss, the company's Q2 confirmed that the fair value of other non-current financial assets changed income of 220 million yuan. The second half of the year will enter the new product cycle, and it is expected that the contribution will continue to increase in 20-21 years. In the second half of the year, Palm Fun Technology entered a new round of product cycles, with abundant reserves of major projects. The company's self-developed ARPG mobile game “True Red Blade” was awarded the Super Star Product of the Hardcore League and was officially launched on August 5. In terms of other product reserves, it is expected that in the second half of 2020, Tencent's exclusive ACT mobile game “Street Fighter: Showdown” and the two-dimensional puzzle-solving mobile game “Supnos” developed upstream will also be launched. In addition, Tencent's exclusive “National Miracle 2” and “Tides of Darkness” (both have editions) are also expected to be launched later, building a solid foundation for growth from the end of the year to next year. The net profit forecast for the mother was raised, and the “buy” rating was maintained. Considering that the company confirmed a large amount of income from changes in fair value in the first half of the year and the uncertainty of the subsequent launch of new products, we fine-tuned the company's 20-22 revenue forecast to 20.44/26.1/32.23 billion yuan (original forecast was 21.12/26.77/3,251 billion yuan, respectively), and raised the net profit forecast for 20-22 to 7.22/10.31/1,263 billion yuan (the original forecast was 644/10.13/1,233 billion yuan, respectively). The current stock price corresponding to PE is 32/23/18x, respectively, maintaining the “buy” rating. Risk warning: the risk of asset impairment, the risk of game projects being postponed/underperforming as expected, and the risk of marginal tightening of industry regulatory policies.