Performance review
The performance in the first half of 2023 is basically in line with our expectations.
Huilun Technology announced its results for the first half of 2023: revenue was US $510 million, up 11% from the same period last year (13.5% year-on-year if the impact of the head media agency business is excluded), which is basically in line with our previous expectations; the adjusted homing net profit was US $10.58 million, and the adjusted homing net interest rate was 2.1%, which was basically in line with our previous expectations.
Trend of development
Mixed realization has become a trend, focusing on building Target ROAS. In the first half of 2023, Huilun Technology Advertising Technology revenue reached US $500 million, an increase of 11.1% over the same period last year. Of this total, Mintegral revenue rose 13.9% year-on-year to $470 million, while Nativex revenue fell 19.4% year-on-year to $30.98 million (the January-February data still includes head media agency revenue). Since 2023, due to the influence of macro-economy, mixed cash (advertising + internal purchase) has become a new trend in the field of game applications. The Mintegral platform based on casual games has encountered a certain degree of development headwinds. On the other hand, the company began to build an intelligent bidding system in the second half of 2021 and officially launched the Target ROAS intelligent bidding function in May 2023, with the goal of estimating the value of traffic and giving differentiated bids. Thanks to Target ROAS, Mintegral revenue growth remained resilient in the first half of the year, with revenue from medium and heavy games growing 76 per cent year-on-year and accounting for about 30 per cent of Mintegral revenue, while management said Mintegral revenue hit an all-time high in July 2023. We believe that the continuous upgrade iteration of the company's algorithm system from IAA (intra-application advertising) to IAP (intra-application payment) will be an important focus in the second half of the year.
Continue to develop artificial intelligence, empower internal and external efficiency. Management said that artificial intelligence will continue to be the key layout area of Huilun Technology: 1) internally, build DevOps Copilot systems to help engineers deliver products more efficiently; 2) externally, with the auxiliary / self-service production of advertising materials as the starting point, models such as Stable Diffusion are introduced and applied in material production tools such as Playturbo, and in the future the company plans to use AI to introduce more sophisticated traffic performance-to-price models into Mintergal.
The gross profit margin remains stable and the cost is optimized continuously. In the first half of 2023, the company's overall gross profit margin was 20.3%, up 0.6% from the same period last year; the adjusted homing net profit rate was 2.1%, up 4.3% from the previous year, mainly benefiting from the reduction of incentive fees and model training costs. We believe that with the continuous optimization of system architecture, the maturity of algorithm capabilities and attempts in areas such as hybrid clouds in the company's Stargate Stargate project, the company's profit margin level is expected to continue to be optimized.
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-state 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 52.2% upside over the current share price.
Risk
International environmental change; goodwill impairment risk; uncertainty to enter new vertical industries; regulatory risk.