Performance review

1H23's results were in line with forecasts and fell short of our expectations

The company's 1H23 revenue was 402 million yuan, an increase of 22%; adjusted net loss was 215 million yuan, compared to a loss of 280 million yuan for the same period last year, falling within the profit warning range of 210 to 220 million yuan, which is lower than our expectations. We think the main reasons are: 1) the amortization cycle for the new tour was slightly longer than expected; 2) the related expenses were slightly higher than expected.

Development trends

“In a Shining Name” drives revenue growth, and is expected to continue to contribute incrementally in the second half of the year. The company's 1H23 revenue increased 22% at the same time. We believe this is mainly due to the launch of “In a Shining Name” (later “Shining Name”) in mainland China. According to Qimai, the product ranked 24/25/36/46 on the iOS game monthly bestseller list from April to July, respectively. It remained within the Top 50, and performed well in the category for women. There is a natural fluctuation in the flow of old products. Looking ahead to the second half of the year, with reference to the deferred revenue situation, we believe “Flash Name” will achieve a full six-month turnover contribution, and the revenue side is expected to increase 1H23 month-on-month.

Sales expenses have risen year-on-year due to the launch of the new tour, and R&D personnel have optimized and adjusted to achieve cost control. Sales expenses increased 40% to 164 million yuan in 1H23, which was basically the same as the previous month, and the sales rate increased by 5 ppt/annum dropped 23 ppt to 40.9%. We believe that the year-on-year increase was mainly affected by the launch of “Flash Name”. Although the product's own purchase volume strategy was relatively conservative, the investment in early marketing expenses was still obvious. At the same time, profit release was relatively limited due to certain delays in revenue recognition, etc.; looking at the month-on-month, “Flash Name”'s turnover contribution to 1H23 reduced the sales rate, which to a certain extent indicates that future profit release can be expected. R&D expenses fell 18.5% to 299 million yuan in 1H23, and R&D expenses also dropped 37ppt to 74%. The company said it was mainly due to cost control over employee benefit expenses and outsourced technical services. As of the end of 1H23, there were about 855 R&D personnel, 70 fewer than at the end of 2022. We believe that by streamlining the company's R&D team, internal management efficiency is expected to be further improved.

New travel reserves are plentiful, and key IP products are arranged in an orderly manner. According to the company's announcement, reserve products for the second half of this year include the international IP mobile game “Avatar: Return to Pandora” (scheduled to be launched in Southeast Asia within the year), the Three Kingdoms IP “Legend of the Three Kingdoms: Honghu Domination” (which will be launched in Asia within the year), and the card-playing RPG “Madtale” (agent). Among them, “Madtale” was launched in Europe, America, and Southeast Asia on July 12, and jumped to the top 10 iOS free list in the first week. We believe it will verify the increase in the company's distribution capacity to a certain extent, and may be expected to further open up room for growth for the company. Judging from the pace of launch, next year we will focus on: “Project Code: IM”, “Avatar” (other regions of the world other than Southeast Asia), “Madtale” (other regions of Asia other than Southeast Asia), and Dragon IP card mobile game “Project E”; in 2025, we can focus on 4 products, including “Project Code: Rebirth.” Furthermore, the product “Flash Name”, which has already been launched, also indicated at its “100 Day Celebration” on June 30 that it is expected that a PC version will be launched in the future, which can also be expected.

Profit forecasting and valuation

Considering that some new products were launched later than we expected, the 2023 non-IFRS net profit was lowered from 270 million yuan to a loss of 220 million yuan, and the 2024 non-IFRS net profit was lowered by 51% to 180 million yuan. It is currently trading at 14 times the 2024 P/E. Maintaining an outperforming industry rating, the target price was lowered by 49% to HK$4.1 due to profit forecast adjustments, corresponding to 15 times 2024 Non-IFRS P/E, with 24% upside.

risks

The launch process and performance of the new tour fell short of expectations, purchases exceeded expectations, relationships with third party publishers deteriorated, macroeconomic uncertainty, industry policy risks, and liquidity risks.