Key points of investment
In 2022, the company's total revenue increased 18.6% year-on-year to RMB 2.80 billion, achieving steady growth; net profit increased from -3.9 billion yuan in 2021 to 290 million yuan, thanks to increased revenue, improved cost control and improved operating efficiency; Guimu's net profit increased from -290 million yuan in 2021 to 130 million yuan, and the profit level increased. The increase in revenue and profit was mainly contributed by social networking businesses.
① In terms of social services, the average monthly active users of the company's social products increased by about 20% year-on-year to about 22.9 million in 2022; social networking business revenue increased 22.0% year-on-year to 2.56 billion yuan. While products such as MICO and YoHo reinforce their dominant position on the vertical track, the company promoted product replication and surpassed TopTop, the leading gaming social networking product in the Middle East. At the same time, the company is deeply involved in localized transportation management, enriching the content ecosystem, enhancing the community atmosphere, strengthening the brand effect, and strengthening social barriers.
② In terms of innovative business, the decline in the company's innovation business revenue as a percentage of total revenue narrowed quarterly in 2022, and the second growth curve is poised to begin. The “Mergeland” series of boutique games launched in 2022 saw rapid growth in downloads and revenue. ③ The company took the initiative to develop a new business layout. In the second half of 2022, the fund established by the company participated in the privatization of the Blue City Brothers, thus quickly entering the vast global LGBTQ social market. On March 23, 2023, the company issued an announcement stating that the company already holds 78.86% of Blue City Brothers' shares and will consolidate Blue City Brothers' financial statements. The merger of Blue City Brothers will help increase the company's revenue and profits. The company can also help Blue City Brothers improve customer acquisition efficiency, operation efficiency, and monetization efficiency in the global market, and accelerate progress on this vast track.
Social business: Revenue in 2022 increased 22.0% year over year to $2.56 billion, and revenue share increased 2.5pct to 91.3%. The company focuses on a global open social circuit and has formed a diverse social product matrix. In this matrix, Mico is the company's core product and has made a breakthrough in the top 15 social app bestsellers in many developed countries such as the US and Japan. Starting in the Middle East and North Africa, YoHo has rapidly expanded in scale. It has entered the top 10 best-selling social apps in the US, France, Italy and other countries. The number of paying users in 2022 increased 40% over the same period last year. Yumy surpassed 50 million downloads in 2022, reached a Google Play rating of 4.9, reversed monthly losses to profits, and continued to increase gross margin. TopTop, a new incubated product developed by the company, is also gradually rising. It has entered the top 3 of the “six Gulf countries” social app bestseller list, and has become a multiplayer social networking platform with various “social+gaming” interactive scenarios. The average active user uses 60 minutes a day. The user scale and business efficiency are also constantly improving, and 2022Q4 revenue has increased more than 30% month-on-month.
Social business: Lancheng Brothers, a subsidiary that will soon be merged, is a leading LGBTQ+ social networking company. It is expected to be merged in 2023H2, which is expected to contribute to incremental revenue and profits. ① The company invested in Blue City Brothers in 2022. On January 14, 2022, Chazicheng Technology announced that it will partner with Spriver Tech Limited and one of its wholly-owned subsidiaries to establish a fund and participate in the privatization transaction of Blued Brothers (Blued) before March 31, of which Chizicheng Technology will invest 50 million US dollars, accounting for 50%. On August 12, 2022, Blue City Brothers announced that the company had completed privatization and would be delisted from the US NASDAQ. ② It is expected that the Blue City Brothers will join forces in 2023H2. On March 23, 2023, the company issued an announcement stating that the company has directly held all of the issued share capital of Chizicheng StrategyInvestment and indirectly holds 78.86% of Blue City Brothers' shares through Multelements, and will consolidate Blue City Brothers' financial statements. Additionally, the company expects to issue a circular by April 30, 2023. Referring to Mico's consolidation timeline, we expect Blue City Brothers to be incorporated into the company's earnings report starting 2023Q3. ③ The Blue City Brothers went overseas in 2015 and focused on LGBT+ people. They are the largest LGBT+ community in India, South Korea, Thailand, Vietnam and other regions. According to the latest information from the company's FY22 press conference, as of 2022, the MAU of Blue City Brothers' products was about 7 million, of which overseas users accounted for about 40%. ④ Blue City Brothers' marginal loss improved. The revenue of Blue City Brothers in 2019-2021 was RMB 760 million, RMB 1.03 billion (YoY +35.9%), and RMB 1.08 billion (YoY +4.4%), of which revenue from overseas accounted for 6.6%, 10.0%, and 11.9% respectively.
The gross margins of Blue City Brothers in 2019-2021 were 28.0%, 30.2%, and 32.4% respectively, and gross margin increased year by year. We expect the revenue growth rate of Blue City Brothers to rise to around 20% and the net interest rate to be corrected in 2023, mainly based on the business synergy between Red City Technology and Blue City Brothers: Red City Technology can support Blue City Brothers in terms of technology, talent, and channels based on overseas localization capabilities to help them achieve revenue growth and market share increase. At the same time, the management experience and professional team of Chizicheng Technology will also provide Lancheng Brothers with more comprehensive and professional management services to help them optimize business processes and improve efficiency, thereby achieving profits. ⑤ The LGBTQ+ social marketplace is vast, and competition is not fierce. According to Frost & Sullivan, the global LGBTQ community increased from 390 million in 2016 to 540 million in 2021 (CAGR = 6.7%), and will continue to grow steadily to 660 million in 2026 (CAGR = 4.2%); the global LGBTQ population is growing faster than the global population, and the penetration rate (LGBTQ number divided by total population) increased from 5.3% in 2016 to 6.9% in 2021, which is expected to rise further to 8.2% in 2026. The global LGBTQ group is expected to rise further to 8.2% in 2026. The contributed GDP will rise from $10.9 trillion in 2021 to $13.8 trillion in 2026 (CAGR = 4.8%, taking inflation into account). The leading apps on the global LGBTQ social circuit are mainly Blued and Grindr. In 2021, the MAU of the two was about 18 million people (not weighted), accounting for only about 3.3% of the total number of LGBTQ people in the world.
Innovative business: Revenue fell 8.3% to $240 million in 2022, and revenue share fell 2.5pct to 8.7%. ① In 2021-2022, the company began focusing on the boutique game business, and launched the synthetic boutique mobile game “Mergeland-Alice's Adventure” in June 2022. It received official global recommendations from Google only two months after launch. Currently, it has entered the top 10 of Google Play's puzzle game bestsellers in 25 countries and regions. According to the latest news from the company's FY22 annual results conference, the monthly revenue of “Mergeland-Alice's Adventure” has already exceeded 1 million US dollars, and the iOS version was launched in February 2023. It is expected that the monthly revenue scale will increase further. ② The game business is in the pre-investment period in 2021 and 2022. According to the 2022 annual results conference, the commercial recycling cycle of “Mergeland-Alice's Adventure” is about 9 to 12 months, and it is expected to start contributing monthly profits to the company in 2023H2. ③ In addition to synthetic mobile games that have already been launched, the company currently has 3-4 premium mobile games under development, namely synthetic and simulated business, and it is expected that new games will be officially launched within 2023.
Profit Forecast and Investment Rating: ① In terms of revenue, the company expects revenue of RMB 3.87 billion (YoY +38.2%) in 2023. Among them, the actual revenue of its own social networking business (excluding Blue City) is expected to be 2.81 billion yuan (YoY +9.8%); Blue City Brothers' annual revenue is 1.32 billion yuan (YoY +20.2%), which includes Chizicheng Technology's portion is 660 million yuan (based on the assumption of 2023H2 consolidation); innovative business is 400 million yuan (YoY +65.0%); the company's estimated revenue in 2024 is 5.05 billion yuan (YoY +30.6%), of which the company's actual revenue (excluding Blue City) is 3.08 billion yuan (YoY +9.6) %), Blue City Brothers earned 1.45 billion yuan (YoY +10.1%), innovative business of 5.2 billion yuan (YoY +30.0%). ② In terms of profit, the company expects adjusted EBITDA profit of 550 million yuan, net profit of 399 million yuan, and net profit of 240 million yuan to the mother in 2023; the adjusted EBITDA profit is estimated to be 650 million yuan, net profit of 490 million yuan, and net profit of 290 million yuan to the mother in 2024. ④ The company's EPS is expected to be 0.20/0.25/0.25 yuan respectively in 2023-2025, corresponding to the current stock price PE of 7.3/5.9/5.9X. I am optimistic that the company's growth logic will continue to be implemented and the “buy” rating will be maintained.
Risk warning: overseas business risk, foreign policy risk, exchange rate fluctuation risk.