1H23 performance meets the forecast

The company's 1H23 revenue fell 25% to 620 million yuan, falling in the forecast range of 60.65 billion yuan; the loss during the period was 80.94 million yuan (1H22 loss 72.96 million yuan), falling in the forecast range of 780 million yuan; the total overall loss during the period was 69.32 million yuan (1H22 loss 51.6 million yuan), and the loss expanded compared with the same period last year.

We believe that it is mainly due to the lacklustre performance of the company at the beginning of the year, the lack of recovery of buying volume, and the existence of special taxes affecting profits.

Trend of development

The performance of new games at the beginning of the year was relatively lacklustre, with 1H23 revenues falling by 25 per cent. At the beginning of the year, the new game "du Lala Promotion" ranked about 150th on the iOS best-seller list at the end of 1H23, which was lower than we had expected. In terms of old games, the performance of "floating Life for Qing Song" (launched in 2019) is still relatively stable, with the best-selling day of 1H23iOS games ranking in the 60th to 90th range. Other old games also fall back as the life cycle grows.

"du Lala" purchase volume and special taxes affect 1H23 profits. The company's 1H23 sales expense rate reached 44.5%, increased 19.1ppt compared to 2H22, decreased 12.4ppt year-on-year, and sales expenses decreased 41% to 276 million yuan compared with the same period last year. We judge that the month-on-month increase is mainly caused by the purchase volume of "du Lala". According to DataEye, du Lala ranks first in the list of 1H23 women buying materials from mobile game App, but slows down after June. And compared with the same period last year due to "Lingyunuo" online and the purchase cost conversion, "du Lala" actual flow conversion, user payment and other performance is slightly weak. Looking forward to the second half of the year, we believe that the stock product launch will remain relatively prudent and orderly, but considering that the "floating Life memory exquisite" new tour is expected to be launched at the end of the year or early next year, it is estimated that there will be some pre-marketing expenses. In addition, the company's 1H23 income tax expenses are 64.37 million yuan (1H22 is income tax credit 1.09 million yuan). The company said that under the uncertainty of performance fluctuations, it is likely that the expected tax loss will not be used before the expiration of the deferred tax assets, which will result in an impairment of about 60 million yuan. In view of the company's operating conditions, we estimate that the possibility of credit reversal during the year is limited.

"floating Life memory exquisite" conducted several rounds of testing this year, or is expected to be launched at the end of 2H23 / early 1H24. The company reserves the antique female sequel "floating Life memory exquisite" to the track since it got the version number in February, it has carried out several rounds of small-scale tests, and it has also carried out a file deletion fee test in July. We believe that if the overall test goes well, the product is expected to be launched from the end of this year to early next year, when it is expected to become a new first-class water pillar for the company's archaic women to the track, boosting the performance in 2024. In addition, the company also has "code: WX" (July limited deletion test), "code: PE" (for overseas) and other products.

Profit forecast and valuation

Due to the poor performance of the new tour and the existence of taxes and fees, the 23-year net profit was reduced by 178 million yuan to a loss of 102 million yuan, and the 24-year profit was reduced by 35% to 208 million yuan. The current share price corresponds to 6.5 times 24-year Pamp E. Maintain the outperform industry rating, considering that the new products may have better performance in 24 years, switch to the 24-year valuation, as the valuation center of the industry has moved up slightly, the target price has been reduced by 17% to 1 yuan (8.5 times 2024 Pmax E), with 32% upside space.

Risk

The performance of Xinyou is lower than expected, macroeconomic downturn, industry regulatory policy risk, liquidity risk.