NetDragon 23H1 had revenue of 3,681 million yuan, -13% year-on-year; operating profit of 699 million yuan, -6% yoy; net profit of 500 million yuan, -12% year-on-year; adjusted net profit of 5.89 yuan, -28%. The game business is steady and revenue has reached a record high; overseas education tablets have launched new mid-range and low-end products, and domestic bids have won domestic bids for projects related to the Ministry of Education. Maintain buy ratings.
Key points to support ratings
Game revenue is growing steadily, and the “Demon Domain” IP continues to increase revenue. 23H1 game revenue was 1,920 billion yuan, +8% year on year, accounting for 52% of revenue; operating profit was 1,094 million yuan, +8.7% year on year. Among them, mobile game revenue was 312 million yuan, +7% year on year, accounting for 16% of game revenue; mobile game revenue was +8% year over year to 1.6 billion yuan, accounting for 84% of game revenue. Domestic game revenue was +9%, and overseas game revenue was +4%. “Magic Domain” IP revenue increased 10% year over year, and “Magic Domain Mobile Game 2,” which was released in March 2023, brought an increase. The “Hero Blade” IP was linked to popular anime IPs, which led to a 12% increase in revenue in the first half of the year. The company is developing the 2.0 version of “Hero Slayer” and plans to release it in overseas markets. In addition, it also reserves a number of MMO and MOBA games, as well as a card game and a casual game.
In the post-pandemic era, sales of educational tablets naturally declined, and Pumi continued to increase its market share by releasing mid-range and low-end products.
22H1 education business revenue was 1,720 million yuan, -29% year on year, accounting for 47% of revenue; operating loss was 249 million yuan, loss increased 14% year on year. The decline in revenue is mainly due to the global education interactive tablet entering an adjustment period in the post-pandemic era. According to Futuresource's forecast, global education tablet shipments in 2023 were about 2.1 million units, or -10.8% from the same period last year. In May 2023, Pumi launched a new, cost-effective product, ActivPanel LX, to enter the low-end tablet market. A large portion of orders for this product came from new customers, and sales will continue to increase over the next few quarters. The company plans to launch a SaaS subscription service integrated with the Pumi tablet before the end of the year, using the Explain Everything platform. In terms of the domestic market, it won the bid for the “National Smart Education Platform for Primary and Secondary Schools” software development service project in July 2023.
Actively deploy AI technology in gaming and education businesses. The game's mid-Taiwan art pipeline has gradually implemented AIGC technology, which can improve efficiency by more than 30% in the 2D character drawing process; in addition, the company is exploring technologies such as intelligent NPCs, guided AI, and competitive AI. In terms of education, the company is developing a customized educational language model that is deeply integrated with tablet devices.
The gross margin of the education business declined slightly, and investment in game development increased. The gross profit margin of 23H1 company was 62.1%, +7.4 ppts; of these, the gross profit margin of the game business was 96.8%, the previous year was +1.1 ppts, and the gross profit margin of the education business was 24.4%, -0.94 ppt. The sales/management/R&D expense ratio was 12.0%/15.5%/17.4%, respectively, compared to +1.6/+4.5/+3.6 ppts. There are many new game products under development, leading to an increase in R&D expenses.
valuations
The revenue and profit growth rate of the gaming business was better than our previous expectations; the sales contribution of new educational tablets will gradually be reflected in the next few quarters, and the SaaS subscription service will bring in additional performance. We raised our net profit for 2023/24/25 to $938/12.46/1,514 million to maintain our buying rating.
The main risks faced by ratings
Membership growth fell short of expectations; advertising fell short of expectations; content regulation exceeded expectations; industry competition intensified.