The company announced its 2023 mid-year report. 1H23 achieved revenue/net profit of 3.68/50 billion yuan, -13.2%/-11.5% over the same period last year. Among them, the gaming business benefited from a +8.1% year-on-year increase in player consumption, and all IPs and platforms achieved good growth and outperformed the market; the education business was affected by weak demand in the global IFPD market and revenue was -28.6% year-on-year. Looking ahead, we judge that the company is expected to use AI technology to empower its game & education business and maintain its leading position in the industry. Considering the weak education IFPD market in the short term, the increase in the company's R&D expenses, and exchange rate fluctuations, we lowered the company's EPS forecast for 2023-25 to HK$1.59/1.87/2.39 (the original forecast was HK$2.23/2.48/2.57). We gave the company 11 times PE in 2024, corresponding to a target price of HK$21, and maintained the “buy” rating.
1H23's revenue/net profit was 3.68/50 billion yuan, -13.2%/-11.5% year-on-year. The decline in performance was mainly due to a sharp decline in the education business. The company announced its 2023 mid-year report. 1H23 achieved revenue of 3.68 billion yuan/ -13.2%, and net profit of 50 million yuan/ -11.5%, which was mainly hampered by the decline in the education business. The gross profit margin was 62.1% /+7.3pcts, mainly due to an increase in the share of the game business with a high gross margin. Operating profit/net profit margin was 19.0%/13.6%, respectively, +1.4/+0.3 pcts over the previous year. The sales/management/R&D expense ratio was 12.0%/15.5%/17.4%, compared with the previous year, +1.6/+4.5/+3.6 pcts, respectively.
Gaming business: The trend is recovering well, outperforming the market. 1H23's game business achieved revenue of 1.92 billion yuan/ +8.1%, an increase of +16% over the previous month, mainly benefiting from the increase in players' game consumption. The proportion of the company's revenue was 52.2% /+10.3 pcts; gross margin increased slightly by 1.1 pcts to 96.8%, and operating profit margin was 57.0% /+0.4 pcts. Specifically, by region ①: domestic game business revenue was +9% (market period +2%), overseas game business revenue bucked the trend and increased +4% (market period -9%). ② Sub-platform: mobile game revenue 1.6 billion yuan/ +8%, mobile game revenue 32 million yuan/ +7%. ③ IP by IP: “Demon Domain” IP achieved excellent results. The revenue of the mobile game and mobile game “Magic Domain” both increased +10% year-on-year, and the number of monthly active and average paying users of “Magic Domain” (mobile game) increased +32%/+16% month-on-month; “Hero Blade” IP benefited from being co-branded with popular anime IPs, with revenue of +12% month-on-month.
Education business: Revenue is under pressure in the short term, and the launch of cost-effective products covers the low-end market. 1H23's education business achieved revenue of 1.72 billion yuan/ -28.6%, accounting for 46.7% /-10.1pcts of the company's revenue. The decline in revenue was mainly due to weak demand in the global education IFPD market; gross profit margin was 24.4% /-0.9 pct, and operating profit margin -14.5% /-13.0 pcts. The company still maintains a leading position outside of the Chinese market. The subsidiary Promethean has an adjusted gross profit margin of 28.4% /year on year - 1.5 pcts; the average product price is 2,267 US dollars/+6% month on month, mainly due to the increase in the share of shipments of the high-end brand ActivPanel 9. In terms of product matrix, the company launched the cost-effective tablet ActivPanel LX in May 2023. The average selling price was 31% lower than ActivPanel Nickel. In the first half of the year, this product accounted for 4% of Promethean's revenue.
Outlook: “AI+” continues to be interpreted to empower the company's business. Game business: The company uses AIGC technology to continuously optimize the game experience, such as improving the interactive experience of intelligent NPCs, and introducing AI companion to improve users' gaming levels. Education business: According to the company's 2023 mid-year report, the company plans to launch the first software subscription service combined with the Promethean tablet at the end of 2023, which is expected to bring sustainable subscription revenue. Furthermore, in April, the company announced the spin-off of its overseas education business and listing on the New York Stock Exchange. According to the company announcement, the transaction is expected to be completed in the third quarter, and the merger will change its name to MYND.AI after the transaction is completed to further promote the transformation of the company's education business in the direction of AI.
Risk factors: macroeconomic pressure; game development falling short of expectations; rising raw material prices; changes in overseas education policies; orders falling short of expectations, etc.
Profit forecast, valuation and rating: Considering that ① the company's education business declined significantly in the first half of the year, and the IFPD market demand for overseas education was weak in the short term; ② the company continues to lay out the AI field, R&D expenses are expected to increase; ③ exchange rate fluctuations, we lowered the company's 2023-25 EPS forecast to HK$1.59/1.87/2.39 (the original forecast was HK$2.23/2.48/2.57), referring to the company's historical average valuation level for the five-year valuation level (12xPE), and the education industry and gaming industry are comparable to the company's 2024 estimate At the value level (Shiyuan Co., Ltd. 14xPE, Kangguan Technology 11xPE, Century Huatong 16xPE, Perfect World 14xPE, all of which are wind's unanimous expectations), we gave the company 11 times PE in 2024, corresponding to the target price of 21 yuan, and maintained the “buy” rating.