Introduction to this report:
The company's game+education is two-wheel drive, IP games have strong vitality, and AI+ education has been fully upgraded in the spin-off listing of education.
Summary:
For the first time, it was covered and given an “increase in holdings” rating, with a target price of HK$22.49. The gaming IP matrix continues to flourish, and education+AI is driving new growth. Considering the progress of the game industry's recovery, the company's IP game product reserves, and the IFPD's overseas market landing progress, the forecast for 2023-2025 net profit is 842, 9.43, and 1120 million yuan, with PE being 8.79X/7.85X/6.60X, respectively. Based on the segment valuation method, the target price was HK$22.49, +47.78% compared to the latest closing price.
The “Game+Education” business is two-wheel drive, firmly investing in R&D and embracing innovation. NetDragon is driven by the dual main business of gaming and education. Gaming is based on its flagship IP, education continues to expand globally with its subsidiary Prometheus as the core, stable equity structure, and rich international management team. 2022 revenue ratio +11.8%, of which revenue from gaming and education continues to grow -5.8% and +34.2%. Revenue continues to grow steadily, game revenue continues to grow steadily, and education losses continue to narrow.
With classic IP as the main position, it extends the vitality of IP and accelerates overseas travel. The company's game revenue in 2022 was 3.43 billion yuan, or -5.8% year-on-year, of which mobile games were -0.2%, and overseas revenue was +6.5%. Mobile games remained steady and expanded against the trend overseas. The company's games focus on the MMO category. Starting from the flagship game “Magic Domain”, it continues to develop new games and continue to extend IP vitality. IP derivatives have achieved full platform coverage of mobile pages. “Magic Domain” accounted for 90% of IP revenue in '21, and “Magic Domain Mobile Game 2” performed well when it went live in '23. At the same time, the company continues to expand its IP matrix, and core IPs such as “Conquest”, “Heroic Blade”, and “Final Vow” help the game go overseas faster.
Global blended learning champion, with overseas spin-offs and listings embracing AI. The company's education revenue in 2022 reached 4.3 billion yuan, +34.2% year-on-year, accounting for 55.1% of revenue. Operating losses narrowed by 27.4%, continued rapid revenue growth, and losses narrowed significantly. The education business is centered on Prometheus, which was acquired in 2015, and its IFPD market position is stable and its share in many countries is number one.
With the popularization of blended learning and the advancement of education informatization, the global and Chinese education informatization markets are developing rapidly. Among them, the Chinese IFPD market is relatively mature, and the overseas IFPD penetration rate is still less than 10%. The company uses Prometheus as the core to build a “hardware-software-content” one-stop hybrid learning solution, with integrated software and hardware, channel networks and localization advantages to help global expansion. Furthermore, since 2016, the company has taken the lead in exploring AI teaching assistants, AI digital people, AI interactive courseware, etc., and has joined hands with Merlyn AI to promote AI+ education product upgrades. In April 2023, the overseas education business announced a spin-off and listing, deepening AI+ education exploration to push the company to welcome new growth.
Risk warning: changes in industry regulatory policies; increased competition in overseas IFPD markets; flagship game performance is declining; new game launch progress falls short of expectations.