The company released its report for the third quarter of 2020 on the evening of October 28, 2020. The company achieved revenue of 1,366 billion yuan in 2020Q1-Q3, an increase of 13.69% over the previous year. The net profit of Guimu was 485 million yuan, an increase of 40.51% over the previous year, and the net profit of the mother after deduction was 374 million yuan, a decrease of 11.68% over the previous year. After splitting, Q20 achieved revenue of 440 million yuan, a year-on-year decrease of 12.96% and a decrease of 14.92%; Guimu's net profit was 41 million yuan, a year-on-year decrease of 69.19%, a decrease of 88.19% over the previous year; and after deduction, Gimu's net profit was 105 million yuan, a year-on-year decrease of 41.26% and a decrease of 41.4% from the previous month.
Non-recurring profit and loss for 20Q3 was -64 million yuan, mainly due to the company's indirect investment in Q3 shares falling nearly 32%, leading to losses due to changes in the fair value of other illiquid financial assets.
Gross profit margin: The company's 20Q1-Q3 gross profit margin was 74.91%, an increase of 16.70 pct over the previous year. The 20Q3 gross profit margin was 73.83%, an increase of 16.45 pct over the previous year. This was mainly due to the company implementing new revenue guidelines and adjusting promotion expenses from main business costs to sales expenses accounting. Net profit margin: The company's 20Q1-Q3 net profit margin was 35.28%, an increase of 6.82 pct over the previous year. The net profit margin for 20Q3 was 9.23%, down 17.04pct from the previous year. “Crimson Blade” was attributed to “Crimson Blade” leading to increased game promotion expenses and fair value losses such as investment and access.
The company's 20Q1-Q3 four-item expenses were 673 million yuan, an increase of 125.8% over the previous year. The overall cost rate was 49.28%, an increase of 24.5 pct over the previous year. After splitting, the company's 20Q3 four expenses were 275 million yuan, an increase of 152.29% over the previous year. The overall cost rate was 62.46%, an increase of 40.86 pct over the previous year. The main reason was the increase in sales expenses caused by the launch and promotion of the new “Crimson Blade” game. The sales expenses of 20Q1-Q3 were 325 million yuan, an increase of 1392.63% over the previous year, and the sales expense ratio was 23.81%, an increase of 22.00 pct over the previous year. After the split, Q3 sales expenses were 140 million yuan, an increase of 1730.70% over the previous year, an increase of 122.7% over the previous month, and an increase of 77 million yuan over Q2 sales expenses. We expect all expenses other than sales expenses to rise month-on-month in Q4 due to bonus expenses. 2020Q1-Q3's net operating cash flow was $281 million, compared to $318 million in the same period last year, a year-on-year decrease of 11.64%.
Currently, the company's leading game “One Punch Man: The Strongest Man” has a stable ranking in Hong Kong, Macao and Taiwan. Tencent's agent “Street Fighter: Showdown”, which is scheduled to be launched on November 26, is expected to bring flexibility to the company's performance (mainly due to next year's performance). The next 3 models (“Street Fighter: Showdown”, “National Miracle 2”, “Tides of Darkness”) contributed to the main performance of Tencent's one-generation blockbuster in '21. Therefore, high performance growth in '21 is still to be expected. 20Q4 and 21Q1 performance pressure is low. The closing price of Reading Technology Q4 has recorded a 43.63% increase Guojin Tianji holds 4.1 million shares of Zmogen Technology, and the company accounts for 74.25% of Guojin Tianji's actual shareholding ratio.
Investment advice: The company's operating performance in the third quarter was affected by “Crimson Blade”'s new game promotion costs and new IP purchase costs, etc., and was pressured in the short term. Coupled with losses due to changes in fair value such as investment management, the third quarter ushered in a low quarterly performance. Considering the performance of “Crimson Blade” and the launch plan for subsequent works, we adjusted the company's profit forecast accordingly. The net profit returned to the mother in 20-22 was 575 million/1,044 million/1,294 million (originally 64/1,15/1.36 billion, respectively), corresponding valuation of 30x/17x/14x to maintain the “buy” rating.
Risk warning: risks such as project launch postponement; turnover falling short of expectations; increased industry competition and stricter regulations
