The company's revenue fell 19% in the first half of the year, mainly due to weak advertising demand. 1) In the first half of 2023, the company's revenue was 690 million yuan, down 19.3% year on year, mainly due to weak advertising demand from Internet customers. By product, revenue from advertising/game distribution/new commercial service business was 5.2/0.8/06 billion yuan, respectively; net profit of Guimu was 190 million yuan, down 35.8% year on year; 2) Looking at the second quarter, the company's revenue was 350 million yuan, down 10.6% year on year; the decline narrowed by 22 Percentage points. 3) In the second quarter, the company's gross margine/net profit margin was 90.7%/24.3%, respectively, -4.5/-3.7 percentage points year on year; the overall cost ratio fell 2.1 percentage points to 65.2%.

The core product of the game remains stable, and the Tom Cat IP has strong influence. 1) In terms of the online game business, the company's products such as “Land Farmer”, “Tom Cat”, “Swamp Battle 2”, and “Mountain and Sea Evolution Road” have obtained version numbers. Among them, the RPG game “Farming the Warrior” was launched in April, topped the App Store game free game list (simulation category), and has been at the top of the TapTap game popularity list for many days. In terms of existing games, the company has carried out major gameplay and economic system updates for “My Talking Tom 2,” etc., to promote long-term performance. The core products all maintain the number of monthly active users in the tens of millions. 2) In terms of animation, film, and television, the company mainly obtains revenue such as licensing and advertising shares for animated works. By the end of June 2023, the total number of animated works in the Tom Cat Family IP series had been viewed more than 100 billion times worldwide. 3) On the offline side, domestic parent-child consumption is picking up. In the first half of the year, the company opened a number of Tom Cat family theme parks. Since the opening of the Jiangxi and Jiangsu Yancheng stores in January, the number of host families has exceeded 30,000.

AI products are progressing smoothly and have a wide range of application scenarios. In terms of AI applications, in the first half of the year, the company initiated an iterative upgrade from “Talking Tom Cat” to “Talking Tom Cat”, and completed closed testing of the functional prototype of the Tom Cat AI interactive product. Functions such as voice recognition, personality settings, and content filtering were added to the AI interactive product to initially achieve product performance such as continuous voice interaction; in terms of cost, the pre-set database will help the company's products improve the speed of intelligent user interaction, optimize interactive content, and effectively reduce interaction costs. At present, the first AI product developed by the overseas team, “Talking Ben AI”, has begun initial testing in countries such as Slovenia, Cyprus, and South Africa; the domestic team has initially implemented product functions such as AI knowledge, AI map reading, AI drawing, contextual dialogue, and spoken English language enlightenment, which can be mainly applied to the field of education.

Risk warning: advertising demand falls short of expectations; application commercialization falls short of expectations; international political and economic risks, etc.

Investment suggestions: The company has scarce leading game IP, perfect online and offline layout, good AIGC product development progress and commercialization implementation scenarios. We maintain our profit forecast. We expect net profit from 2023-2025 to be 69/81/990 million yuan respectively, with a year-on-year growth rate of 55.9%/18.6%/22%; diluted EPS = 0.2/0.23/0.28 yuan. The current stock price corresponds to PE=29x/24x/20x, maintaining the “increase in holdings” rating.