Performance preview
Forecast a 23% year-on-year drop in 1H22 revenue
The company forecast that 1H22 revenue fell 23% year-on-year to HK $2.49 billion, mainly affected by the decline in the main game stream year-on-year, with a consensus forecast of HK $2.51 billion; 1H22 reported a net loss of HK $175 million (1H21 is a net profit of HK $577 million). The company's performance forecast is in line with our expectations.
Pay attention to the main points
Internal and external impact caused 1H22 revenue pressure, in the operation of the game natural decline. The company announced that 1H22 revenue decreased by 23% compared with the same period last year, mainly because the main game entered a mature period, game revenue fell naturally.
Key products: "Kingdom era" 1Q22 flow is relatively under pressure, since the second quarter of this year through the introduction of new games, new versions and other ways to drive product optimization, some led to a short-term slight rebound. From the perspective of external factors, considering that the relevant payment channels in Russian-speaking areas are still limited, the performance of the Russian market has not improved.
According to SensorTower, Kingdom era ranked 79th on the list of China's overseas mobile games revenue from January to May 2022. The overall performance of products such as "Princess of time" and "Mythic Heroes" was relatively stable in the first half of the year. We believe that, on the whole, the game revenue is under pressure both inside and outside the company in the first half of the year.
The cost investment is stable and sustained, and the resource optimization reduces the cost and increases the efficiency to make the game business achieve a turnround in 2Q22; the net loss on investment is a drag on performance. The company announced that the loss of its main business in the first half of the year is expected to be HK $60 million. The company said that through the integration of resources to optimize cost reduction and efficiency, the loss of the main game business narrowed month by month in the first half of the year, in 2Q22 to achieve a turnaround. We judge that 1H22 R & D and sales expenses are slightly lower than the previous month. Specifically, in terms of R & D investment, the company said that due to the increase in R & D investment in new game projects, 1H22 R & D expenses increased by 49% year-on-year to HK $740 million, slightly lower than the previous month. In terms of sales expenses, the overall launch of the stock game is stable, and we judge that the short-term launch of products such as "Mythic Heroes" and "Princess of time" will maintain the current strength.
In addition, the company said a net loss on 1H22 investments of about HK $115 million dragged down results, compared with a net income of HK $88 million in the same period last year.
Waiting for stock product version update and new online catalysis. The company said that "Mythic Heroes" is expected to be added in the near future. We judge that products in operation may be expected to boost performance through continuous optimization. In terms of new games, "Yeager: Hunter Legend" (Project Yeager) has recently been launched to test the Android version, and the company said that "Project MR2.0" is also expected to be launched within this year. In addition, the company said that it also has more than 20 products under research, all of which are expected to be launched this year. We recommend that we continue to pay attention to the new versions of key products and the performance of new games products.
Profit forecast and valuation
Due to the pressure on the revenue of the old games and the relative persistence of the investment in fees, we have lowered our revenue forecast for 2022 Universe by 6.3% to HK $4.86 billion / HK $4.92 billion, the original adjusted net loss of HK $350 million to HK $410 million in 2022, and the adjusted net profit by 14% to HK $410 million in 2023. To maintain the neutral rating, due to the adjustment of earnings forecasts and the downward trend of the industry valuation center, the target price has been lowered by 29% to HK $3.4, corresponding to 10 times the 2023 adjusted Pmax E, with 11% upside space. The current trading is 9 times 2023 adjusted Pmax E.
Risk.
Poor performance of the game, geopolitical and regulatory risks, higher-than-expected spending, and macroeconomic pressures.