23H1 Xindong achieved revenue of 1.75 billion yuan, which is in the median of estimated profit revenue of 1,72-1.78 billion yuan, an increase of 10%. The increase in revenue was mainly due to the increase in TapTap advertising. Achieved net profit of 100 million yuan, which is in the median performance forecast, with a loss of 381 million in the same period last year. The marked improvement in profit was mainly driven by increases in revenue and gross margin, and reductions in R&D and sales expenses. It is expected to achieve revenue of 3,96/4.54/5.14 billion yuan in 23-25, adjusted gross profit of 305/417/576 million yuan, 2.8 times PS based on 23 years' revenue, a valuation of RMB 1.1 billion, a target price of HK$2.48 per share, and maintain a “buy” rating.
Revenue is in the median forecast, and ads drive revenue growth
23H1 achieved revenue of 1.75 billion yuan, which is in the median of forecasted revenue of 1,72-1.78 billion yuan, an increase of 10%. The revenue growth was mainly driven by the growth of the TapTap advertising industry.
Advertising prices drive outstanding performance in advertising revenue. 23H1 achieved advertising (information service) revenue of 600 million dollars, an increase of 29% over the previous year. Judging that the increase in advertising business is mainly due to the increase in advertising prices, mainly due to the recovery in demand from advertisers in the game advertising industry and the scarcity of advertising space supply. Resonance between supply and demand is driving up advertising prices.
The Chinese version of 23H1 TapTap had a monthly activity of 33.97 million, down 18.6% from the previous year. This was mainly due to lower marketing investment under high-quality development, which put pressure on the number of new broad-based users. According to financial reports, the company made strategy adjustments in June and July, and TapTap resumed growth in July, reaching 39.3 million. The summer season is the peak advertising season. Coupled with the recovery in monthly activity of TapTap in July, the volume and price of the summer advertising business is expected to rise sharply. It is expected that the advertising business will continue to grow throughout the year.
Game growth is slowing down due to multiple factors. 23H1 achieved game revenue of 1.15 billion, an increase of 2.1% over the previous year. Judging the slowdown in the game business growth rate is mainly due to the slowdown in the growth rate of “Sausage Party”, the decline in revenue from old games such as “Ragnarok M” & “Neverending Urara”, and the new games “Torchlight” and “Fire Soda” (T3), which entered the domestic market on May 10 and June 9, 23, respectively, with few revenue confirmed in Q2. The number of active users and turnover of “Sausage Party” reached a record high during the Spring Festival, but after the Spring Festival, MAU and MPU declined due to a decrease in user gaming time and the launch of competing products.
23H2, superimposed on the peak summer season, the confirmation of new game revenue, and the launch of the new “Torchlight” season, the growth rate of game revenue is expected to pick up. Looking forward to the future, the self-developed game “The Sword of Suzuran” received a version number in July. According to financial reports, it was launched in August in Hong Kong, Macao and Taiwan, and is scheduled to launch in the mainland on 23Q4. Furthermore, according to financial reports, the placement game “Let's Go Muffin” is scheduled to be launched in 23Q4 or 24Q1, which will contribute to the subsequent growth of the game business.
Profit was in the median of the performance forecast. Gross profit margin, R&D and sales expenses jointly drove 23H1 to achieve a net profit of 100 million yuan, and in the median performance forecast (the estimated net profit range of 70 million to 130 million yuan), with a loss of 381 million in the same period last year. The marked improvement in profit was mainly driven by increases in revenue and gross margin, and reductions in R&D and sales expenses.
23H1 achieved gross profit of 1.04 billion dollars, a year-on-year increase of 32.5%, a gross profit margin of 59.2%, and YoY +10.05 pct, mainly due to the combined increase in gross margin of games and advertising, an increase in the share of advertising revenue with higher gross margin, and a decrease in bandwidth costs. The gross margin of games reached 47.3%, YoY +7.17pct, mainly due to the increase in the share of revenue from self-developed games with higher gross margin, and a year-on-year decrease of 3.5 pct of game sharing costs in game revenue. The gross margin of advertising reached 81.9%, YoY +11.15 pct. The judgment is mainly due to the scale effect brought about by the significant increase in advertising revenue.
Bandwidth cost decreased by 32.1% year on year, and its share of revenue decreased by 4.3 pct. Server usage declined mainly due to an increase in server usage utilization and a decrease in the number of gaming and TapTap users.
23H1's R&D expenses were 530 million dollars, a year-on-year decrease of 19.6%. The R&D cost rate was 30.1%, YoY -11.07 pct. Mainly due to optimization of R&D personnel, the number of R&D personnel decreased by 17.6% over the same period in '22, and the number of R&D personnel dropped from 1,387 in 22H1 to 1,143 in 23H1. 23H1's sales expenses were 330 million dollars, a year-on-year decrease of 18.2%, a sales expense ratio of 18.8%, YoY -6.48pct. Under cost reduction and efficiency, the company effectively controls TapTap (domestic+overseas) marketing investment and optimizes sales expenses. 23H1's management expenses were 100 million yuan, a year-on-year decrease of 2.6%. The management expenses rate was 5.8%, YoY -0.75pct.
Investment advice
The company has entered a stage of high-quality development, focusing on hand games and the refined operation of TapTap, and its performance is expected to grow steadily. Looking ahead to 23H2, during the peak summer season, community advertising+gaming boom will both increase, which is expected to drive revenue growth faster than 23H1. Profitability is expected to increase further as cost reductions and efficiency continue to increase. It is expected to achieve revenue of 3,96/45.4/5.14 billion yuan in 23-25, adjusted profit of 305/4.17/576 million yuan, 2.8 times PS based on 23 years of revenue, a valuation of RMB 1.1 billion (RMB: HKD exchange rate is 0.93), and the target price is HK$24.8 per share, maintaining the “buy” rating.
Risk warning
There is a risk that game consumption will decline and competition in the game industry will increase.