Incident: The interim report was released, and the decline in revenue and profit both narrowed. The company released its 2023 interim report. In the first half of the year, the company achieved revenue of 690 million yuan, down 19% year on year and 12% month on month; realized net profit of 190 million yuan, down 36% year on year, and 25% month on month. Among them, we achieved revenue of 350 million yuan in a single quarter in the second quarter, a year-on-year decrease of 11%, a year-on-year increase of 2%, and net profit of 90 million yuan, a year-on-year decline of 22% and a decrease of 17% month-on-month; the decline in revenue and profit both narrowed. We believe that the decline on the revenue side was mainly affected by factors such as the global economic downturn and advertisers' strategic reduction in online advertising; the profit side was also further affected by the year-on-year increase in financial expenses, mainly due to increased interest expenses and exchange losses caused by fluctuations in the exchange rate between the euro and the US dollar.

Long-term operation of classic products, actively promoting the launch of games and AI products. During the reporting period, core matrix products such as “My Talking Tom,” “My Angela,” and “Tom Cat Parkour” all maintained tens of millions of monthly active users. Furthermore, on the 10th anniversary of the launch of “My Talking Tom”, the company introduced major gameplay and economic system updates to promote user activity and stickiness. In terms of new products, the company's products such as “Land Farmer”, “Tom Cat”, “Swamp Battle 2”, and “Mountain Sea Evolution” have successively obtained versions during the reporting period. Among them, the RPG game “Land Farmer” developed by the company's domestic team was officially launched in the domestic market in April of this year. In the second half of the year, the company will actively promote “Talking Ben AI”, “Tom Cat Picture Book”, and “Talking Ben AI”

R&D and launch of other game products and AI products.

AI product development continues to advance, looking forward to a second growth curve. The company tested embedding the “Tom Cat” IP image into the functional prototype of the AI interactive product, and initially achieved product performance such as voice interaction and continuous dialogue. The AI product functional prototype developed by the domestic team has been tested in two rounds of closed testing. In addition, the company invested in West Lake Xinchen and set up a joint venture with it to promote the development and implementation of Tom Cat AI interactive products. The company's overseas R&D team combines large third-party models with pre-set databases to improve interaction speed, optimize interactive content, and reduce interaction costs. “Talking Ben AI”, the first AI product developed by an overseas team, has begun initial testing in countries such as Slovenia, Cyprus, and South Africa. In addition, the company's overseas subsidiaries have invested in children's reading aid software KOBI, which uses AIGC technology to generate customized reading materials according to the interests of different child users. The app has been tested and distributed in North America, and the company will determine further business cooperation in the future based on the development of KOBI's own business.

Profit forecast and investment advice: Taking into account this quarter's business conditions and incremental information in the interim report, we adjusted the company's revenue forecast for 2023-2025 to 18/20/2.2 billion yuan, an increase of 12%/11%/10% over the previous year; adjusted the return net profit forecast to 58/69/8.1 billion yuan, an increase of 32%/19%/17% over the previous year. We are optimistic about the vast space brought by the combination of the company's products and AI technology, and maintain the company's buying rating.

Risk warning: risk of macroeconomic fluctuations; risk that product launch progress falls short of expectations; industry competition increases risk.