1H23's net loss was slightly better than forecast and our expectations.
The company reported 1H23 results: revenue of HK $2.5 billion, up 1% from a year earlier, and a net loss of HK $360 million, compared with HK $172 million in the same period last year, slightly better than the previous forecast of HK $400 million and our expectations. We believe that the gross profit margin is slightly better than expected due to the adjustment of income structure and the decline in channel costs. The adjusted net loss was HK $334 million, compared with a net loss of HK $105 million in the same period last year.
Trend of development
Two key new games and APP business help 1H23 revenue growth, "LM" month-on-month basic stability. For key new tours, "Doomsday" and "Viking Rise" 1H23 earned HK $250 million and HK $123 million respectively, accounting for 10 per cent and 5 per cent respectively. In terms of old games, the revenue of "Lords Mobile" reached HK $1.66 billion in the first half of the year, unchanged from the previous month, accounting for 66%. It is still the company's largest flagship product, and the overall flow remains stable. In terms of APP business, the company said that its business has entered a period of rapid growth, with monthly flow rising from HK $1.2 million at the beginning of the year to HK $57.5 million in June, and 1H23 revenue reaching HK $189 million.
In terms of gross profit margin, the company said that due to the increase in the share of APP business revenue and the decline in group collection channel costs, 1H23 gross profit margin increased by 4ppt to 72% compared with the same period last year.
The concentrated launch of Xinyou has led to a substantial increase in sales costs, and the R & D team continues to promote optimization and integration to control expenditure. The company's 1H23 sales expenses rose 85 per cent year-on-year to HK $1.521 billion, and the sales expense rate increased to 60.9 per cent (33.1 per cent 1H22/2H22 41.8 per cent). We think it is mainly due to the concentrated launch of two new games. In terms of R & D and management costs, 1H23 R & D expenses fell 32 per cent year-on-year to HK $500 million, while management fees fell 19 per cent to HK $159 million. The company said that in terms of R & D and management expenses, the company adopted a strict control approach as a whole to optimize and integrate the existing R & D team, continuously optimize the group's resources, greatly improve human efficiency and achieve better cost control; at the same time, R & D expenses also have an impact on the active application of AIGC technology.
The group level returns to profit in June, and the pre-marketing investment of new products may be gradually recovered. The company said it had returned to profit in June and returned to HK $500 million in July at the group level, of which the "Doomsday" / APP business stream in July was HK $820 million / HK $63 million respectively. We believe that the company is expected to gradually recover the initial investment in 2H23. In addition, the company reserves "Project PX" (MMORPG), "Mafia King" (SLG) and other products are also continuing to promote research and development and testing.
Profit forecast and valuation
Maintain the 2023max 2024 profit forecast. The current share price corresponds to a price-to-earnings ratio of 9.5 times 2024 Non-IFRS. Maintain the outperform industry rating, but due to the downward shift of the valuation center of the industry, the target price was lowered by 29 per cent to Rmb3.63, corresponding to 10 times 2024 Non-IFRS price-to-earnings ratio and 6 per cent upside.
Risk
New Tour and new business performance is lower than expected, the main product flow decline, higher-than-expected expenditure, geopolitical and regulatory risks, macroeconomic pressure.