FriendTime's 1H23 results missed our estimates/consensus, with rev -25% YoY and adj. net loss at RMB78mn on declining legacy games and soft new titles.Looking into FY24E, we expect moderate recovery with the launch of the Twist of the Fate, and the company to turn a profit with RMB38mn in FY24E. To factor in game softness and potential S&M expenses incurred by new launches, we cut FY23-25E rev by 21.1-25.8%, while trimmed NPM by 1-15ppts. Our DCF-based TP was adjusted to HK$1.32.
1H23 soft on game decline and heavier S&M. 1H23 rev declined 25% YoY, 34% below consensus, mainly attributable to 1) weaker-than-expected legacy games; 2) soft A story of Lala's: Rising Star with S&M scaling back for unsatisfied user retention; and 3) high base due to launch of Promise of Linyun in 1H22. Adj. net loss came in at RMB78mn, dragged by promotion of A story of Lala and RMB63mn impairment of the deferred tax assets.
Looking into moderate recovery in FY24E. Due to the lack of new launches and declining legacy games, 2H23E might still bear pressure (forecasting rev -25% YoY), before the launch of The Twist the Fate (ToF, 浮生忆玲珑) in 4Q23E/FY24E. On the flip side, FT is likely to achieve breakeven in 2H23E (forecasting net profit of RMB0.76mn), thanks to stringent cost control on both staffing and project management, along with lower S&M expenses. Looking into FY24E, we expect FT to see moderate recovery (forecasting +23% YoY), backed by contribution of ToF. In Jul 2023, the game launched a one-month "Summer Beta Test" with in-game purchases enabled. We expect ToF to be launched in 4Q23E/1H24E and achieve meaningful rev contribution in FY24E.Given S&M expenses for launch are front-end loaded, margin might be diluted in the near term. As such, we forecast FY24E rev to achieve positive growth, and turn to a profit with RMB38mn for the whole year.
Diversified genre and overseas expansion for LT growth. In 1H23, overseas market accounted for 39% of total rev (vs. 25% in 1H22). Apart from female games, FT will test the water for martial arts game (e.g. Code: WX) and European royalty type (Code: PE) in FY24E. We expect its diversified category & overseas expansion to reduce concentration and bring LT growth.
Maintain BUY. To factor in soft game and potential S&M expenses incurred by ToF, we cut FY23-25E rev by 21.1-25.8%, while trimmed NPM by 1-15ppts.Our DCF-based TP was adjusted to HK$1.32.
