Performance review

1H23 results are in line with forecasts and our expectations

The company announced 1H23 results: revenue of 334 million yuan, up 25% year on year; net profit of 41.72 million yuan, falling into the forecast range of 30 to 50 million yuan; net profit of 41.48 million yuan; net loss of 75.67 million yuan for the same period last year.

Development trends

“The Strongest Snail” has a steady flow, the launch of the new tour has contributed more and more, and the company's revenue structure has been optimized. “The Strongest Snail” 1H23 achieved revenue of 210 million yuan (1H22/2H22 were 244/34 million yuan respectively), accounting for about 63% of revenue. We believe “The Strongest Snail” has shown good flow sustainability through long-term operation and global layout. Currently, the game has been launched in many regions such as Japan, Thailand, and North America. The company said it will promote the launch in other regions of Southeast Asia in the future. In terms of new games, the company and China Mobile Games jointly published “Sword and Fairy: Sword Waving and Enquiry” was launched on June 9. 1H23 achieved revenue of about 68.3 million yuan. We believe that in the future, we expect to maintain excellent performance based on IP influence and the company's long-term operation capabilities; 1H23's newly launched domestic products contributed a total of 96.1 million yuan in revenue. We believe that the company is gradually starting a new product cycle, its dependence on a single product is reduced, and the company's revenue structure is expected to be optimized. In terms of gross margin, 1H23 increased by 6ppt to 67.5% year-on-year. The company said it was mainly driven by channel commission cost optimization and revenue scale effects.

Expense investment was effectively controlled, and losses were reversed year on year by 1H23. The company's overall expenses decreased during the 1H23 period. Among them, sales/R&D/management expenses fell 19%/20%/48% year-on-year to 1.23/0.45/210 million yuan, respectively, and the cost ratio decreased by 20/7/9ppt to 37%/13%/6%, respectively. The company stated that the main departments are:

1) Compared to 1H22, “The Strongest Snail” has reduced marketing and promotion expenses in Japan; 2) Sales/R&D/management staff optimization. We have determined that 2H23 has launched multiple new games or generated certain promotion demand. We expect the absolute value or increase of the company's sales expenses, while the cost rate is expected to be relatively stable under control.

There are plenty of diversified reserve products. Key games plan to launch mini-game versions, and follow the product launch progress. In terms of reserve products, according to the company's announcement, the company currently has 12 mobile games in reserve, including “Magic Card Girl Sakura: Key to Memories” (scheduled for September 21), self-developed Rogue-like “Time Travel Agency” (scheduled for September 21), self-developed Rogue-like “Time Travel Agency” (preparing for a new round of paid testing); various proxy products already have versions, and the company has also introduced a new authorized “Project: Totem”. In terms of the minigame layout, the company said that the H5 mini-game versions of “The Strongest Snail” and “Sword and Fairy Tales” are being prepared. We believe that the company has developed a rich variety of products and reserves by agents, and that the product launch plan is progressing in an orderly manner; key games are also expected to increase revenue with the H5 version. It is recommended to continue to pay attention to the company's new product testing and launch progress and subsequent performance.

Profit forecasting and valuation

Maintaining the 2023/2024 profit forecast, the current stock price corresponds to 9/5 times 2023/2024 non-IFRS P/E. Maintaining an outperforming industry rating and a target price of HK$7.0, corresponding to 12/7 times 2023/2024 non-IFRS P/E, there is 33.3% upside from the current stock price.

risks

Game launch progress or turnover falls short of expectations, single product dependency risks, macroeconomic downturn affects entertainment spending, industry regulatory policy risks, and liquidity risks.