Revenue declined in the third quarter, but the results for the first three quarters were still up from the previous year. From January to September 2020, the company achieved operating income of 1,366 million yuan, an increase of 13.69% over the previous year; achieved net profit of 485 million yuan, an increase of 40.51% over the previous year; net profit of the non-return mother was 374 million yuan, a decrease of 11.68% over the previous year. The company achieved revenue of 440 million yuan in Q3 2020, a year-on-year decrease of 12.96%, a year-on-year net profit of 41 million yuan, a year-on-year decrease of 69.19%, after deducting net profit of 105 million yuan from non-return mothers, a decrease of 41.26% from the previous year. We think the reason for the decline in the third quarter was: 1) Increased promotion in the early stages of the game's launch. Sales expenses in the third quarter increased 122.7% month-on-month to 140 million yuan, and the sales expense ratio increased 19.69 pct month-on-month. At the same time, new travel revenue was delayed, and the contribution to revenue was limited; 2) the company's R&D investment increased. The company's R&D expenses increased 11.30% year-on-year in the first three quarters, and the R&D expense ratio increased slightly by 1.78pct to 20.93% year-on-year. Among them, R&D expenses in the third quarter increased 16.31% over the same period last year. 3) The fluctuation in profit and loss from changes in fair value is quite obvious.
The company lost 96 million yuan due to changes in fair value in the third quarter, and investment in other equity instruments decreased by 32.68% compared to the end of the previous year, which had a great impact on the company's current performance.
Overall gross margin remained stable, and investment in R&D continued to increase. Gross margin fell slightly by 2.03pct month-on-month to 73.83% in the third quarter. Since the company included promotion expenses in sales expenses from the beginning of the year, gross margin remained stable; the sales expense ratio increased 19.69pct to 31.87% month-on-month; the management expense ratio remained stable at 5.54%; the R&D expense ratio increased 5.91 pct year on year, rising 4.90 pct to 23.48% month on month; investment in R&D continued to increase in R&D investment in the third quarter; operating cash flow declined due to the purchase of excellent IP and the corresponding increase in prepaid installments in the third quarter .
The core products have performed well when launched overseas, and it is worth looking forward to a variety of new games with big IPs. The ARPG mobile game “Crimson Blade”, which was launched by the company on August 5, was rated as a superstar product of the Hardcore League. The average ranking of iOS game bestsellers during the reporting period was 78. The core product “One Punch Man: The Strongest Man” performed well in the first half of the year. It was launched in Southeast Asia in June, and quickly reached number one on GooglePlay download lists and AppStore download lists in Singapore, Malaysia, Thailand, the Philippines, etc. The company's new games “Street Fighter: Showdown” and “National Miracle 2” are all represented by Tencent. Among them, “Street Fighter: Showdown”, which relies on the world-famous flagship IP “Street Fighter”, will go live on November 26. Combined with innovative gameplay in the card category, Tencent's official website currently has more than 5.8 million reserved players, and TapTap's rating is 7.2 points. “Miracle for All 2” was created by Unreal Engine 4 and is already open for pre-orders on the Tencent gaming platform. In addition, “Tides of Darkness” and “Supnos” are also expected to be launched later. The new game's performance is worth looking forward to.
Profit forecast and valuation analysis: We expect the company's EPS from 2020 to 2022 to be 0.22 yuan, 0.36 yuan, and 0.45 yuan respectively. Referring to the 2021 PE expectations of comparable companies in the same industry, we gave the company 20 to 25 times the target PE for 21 years, corresponding to a reasonable value range of 7.2 to 9.0 yuan, maintaining a superior market rating.
Risk warning: The launch of new games is delayed, the performance of new games falls short of expectations, and loss of goodwill.