Forecast 2022 to achieve a net profit of 2100,026 million yuan, slightly lower than we expected the company to issue a profit warning, forecast 2022 operating income of about 150,555 million yuan (down 40.7% from the same period last year), and net profit for the year was about 2100,260 million yuan (down about 90,92,000,000 yuan compared with the same period last year), slightly lower than our expectation. 2H22 expects to achieve a net profit of 940,000,000 yuan (a decrease of about 32% and 25% compared with the same period last year). We judge that 1H22 "Lingyunuo" online promotion led to current losses; but 2H22 products gradually into a stable period, the company's profit margin or improvement.

Pay attention to the main points

2H22 "Ling Yunnuo" flow stabilized, the main product "floating Life for Qing Song" bestseller list performance steady. According to Qimai data, 3Q22/4Q22 "Lingyunuo" (launched in January 2022) China's iOS game best-selling list ranked 77th per day, respectively, compared with the average ranking of 1H22 dropped by 10 to 20 places, the overall performance is still robust. The flagship product "floating Life for Love" 2H22 ranks 50th on the daily best-seller list of iOS games (down 20 / 8 places respectively compared with the previous month). We believe that the company's products reflect the characteristics of a long life cycle, and are expected to maintain the stock of games with long-term operation, and the company's revenue in 2022 may be relatively robust compared with the same period last year.

"Lingyunuo" has entered the stable period of the product to release profits, and the cost rate is expected to improve during the 2H22 period. In terms of marketing investment, the company said that 2H22 adjusts the "Ling Yunnuo" product release strategy to stabilize game revenue with refined operations and various content iterations. We expect the 2H22 sales expense rate to be relatively stable or slightly higher than the same period last year, with a significant decline in ring comparison; we expect the annual sales expense rate to increase by about 13~15ppt year on year in 2022. In terms of R & D investment, we judge that the company continues to invest in self-developed products, and 2H22 continues a relatively stable level of investment; we expect the volume of R & D investment for the whole year to be relatively flat compared with the same period last year.

Self-developed new tour "du Lala Promotion" has been launched, and the new product cycle can be expected. In terms of stock products and new games, on January 12, 2023, the company launched its own research on women's promotion of du Lala, a mobile game. The company said that its products rose to 48th on the best-selling list of iOS games in China, while "floating Life" and "Lingyunuo" were also stable in the top 100th of the best-selling list of iOS games. In terms of reserve products, the company's self-developed female antique mobile game "floating Life memory exquisite" ("floating Life for Qing Song" sequel) was approved on February 10, and the company also has a reserve of multi-style products, including "code: PE", "code: WX" and so on. Looking forward to 2023, we believe that the company's head stock products are expected to maintain a relatively steady flow performance, the launch of the new tour "du Lala Promotion" is also expected to contribute to revenue increment, and the research and development process of reserve products is steadily advancing or will be launched one after another.

Profit forecast and valuation

Considering that the product performance is slightly lower than expected, the net profit forecast for 2022 will be reduced by 24.4% to 26.25 million yuan; at the same time, considering the launch of new products or the increase in marketing investment, the net profit forecast for 2023 will be reduced by 21.7% to 209 million yuan, and the profit forecast for 2024 will remain unchanged. The current share price corresponds to the 10.3 pound of 2023 Universe in 2024, which is 6.0 times the price of Pax E. Maintain the outperform industry rating, consider the upward move of the industry valuation hub, and maintain the target price of HK $1.40, corresponding to 13.0 times 2023 PCompE, which has 21.7% room to rise compared with the current stock price.

Risk

The progress or flow performance of new tourism is lower than expected; macroeconomic impact on entertainment consumption expenditure; industry regulatory policy risk; liquidity risk.