Revenue is forecast to grow 10.9% in the first half of 2023 compared with the same period last year.

We expect revenue to grow 10 per cent year-on-year to $500 million in the first half of 2023, with an adjusted net profit of $13.4 million (compared with $24.1 million in the same period last year) and a corresponding adjusted net interest rate of 2.7 per cent.

Pay attention to the main points

Business development may face short-term headwinds and still have potential in the medium and long term. We expect advertising technology revenue to grow 9.8% year-on-year to $490 million in the first half of 2023. Of this total, revenue from the programmed platform Mintegral is expected to be $470 million, slowing to 14.0% year-on-year growth. On the one hand, the financing constraints brought about by the overseas high interest environment prompt start-up game companies to be more cautious about launching and promoting new products, and pay more attention to the deep realization of existing game products, and the cash model also gradually introduces elements such as payment in addition to advertising display. As light games are an important customer group of Huilun Technology, we expect the growth of the company's advertising technology business to be negatively affected in the short term. On the other hand, it may take some time for the company to access the Google AdMob process and revenue climb. However, from a medium-and long-term perspective, we believe that two major drivers are expected to lead to a gradual recovery of the company's performance in the future: 1) the gradual maturity of moderate and heavy game delivery algorithms.

Mintegral launched Target ROAS intelligent bidding function 1 in May 2023 to build omni-channel data back modeling and intelligent budget allocation capabilities, the algorithm iteration in the field of moderate and severe games tends to mature, and we believe that the company's share of revenue in moderate and severe games may be further increased in the future; 2) the gradual landing of cooperation with Google AdMob. In addition, Huilun Technology actively seizes the opportunity of the AI model and strives to create more AI-enabled products: for example, XMP, an advertising tool based on AI capabilities, has functions such as access to ROAS data and SDK platforms, and can simplify material processing and advertising processes.

Gross profit margin is expected to rise month-on-month, and net profit margin may remain stable. Benefiting from the continuous optimization of algorithms and the improvement of computing power, we expect the cost control capability of Huilun Technology to be continuously optimized. It is estimated that the company's overall gross profit margin in the first half of 2023 will be 19.5%, corresponding to 19.9% in the second quarter. An increase of 0.7 percentage points compared with the first quarter. On the net profit side, we expect the company to remain profitable in the first half of 2023, but taking into account the high base profit caused by business divestiture earnings in the first half of 2022, the adjusted homing net interest rate is expected to fall 2.6 percentage points to 2.7% in the first half of 2023 compared with the same period last year.

Profit forecast and valuation

The income and adjusted homing net profit forecasts for 2023 and 2024 will remain unchanged. Maintain the outperform industry rating and target price of HK $5.6 (based on the 2023 segment plus total valuation method, based on the macro environment and the company's business progress, we believe that the advertising business will reach a steady net interest rate by 2026. The company is currently trading at 0.7 times the 2023 market-to-market ratio, and the target price has 49.7% upside over the current share price.

Risk

International environmental change; goodwill impairment risk; uncertainty to enter new vertical industries; regulatory risk.