With the resumption of games in the first half of 2023, education declined due to the digestion of high base income: total income decreased by 13% compared with the same period last year, of which game / education income + 8% was 29%, and total revenue was 47% as we had expected for 2023. Among them, games / education completed 52% and 43% respectively. The adjusted net profit decreased by 28% compared with the same period last year, mainly due to the pressure of the growth of education income and management expenses, resulting in an increase in losses. After the adjustment of the game business, the operating profit increased by 10% compared with the same period last year, and the operating profit margin was driven by server cost optimization / operating expense control to 58% (year-on-year + 1%, month-on-month + 8%). The operating loss rate of education business increased to 14% compared with the same period last year, mainly due to a decline in revenue, but improved by 2 percentage points compared with the same period last year.

As we had expected, the game business returned to positive year-on-year growth. Education income is under pressure, but it is expected to return to positive growth in the second half of the year: 1) the decline in game revenue in 2022 is related to macro weakness and achieved a 28% increase in the number of paid accounts. As the industry recovers, the game business will return to normal growth in 2023. Game ARPPU grew by 24.5% in the first half of the year compared with the same period last year, with PC games / mobile games increasing by 8% and 7% respectively. 2) due to the purchasing cycle of overseas educational products, Pumi's revenue fell by 29% in the first half of the year, but LX, a new product released in May, has begun to ship (the unit price is lower than the previous average price of 31%), which will lead to positive growth in sales and income in the second half of the year.

Outlook: we expect net dragon game revenue to increase by 8% year on year in 2023 to 3.7 billion yuan (slightly better than the 3.66 billion yuan expected at the beginning of the year), while education revenue is expected to maintain a downward trend, of which Pumi revenue is expected to decline by 17% to 3.1 billion yuan. the company's overall revenue for the whole year is expected to decline 8% to 7.2 billion yuan (down 8% from the previous 7.8 billion yuan). On the profit side, we maintained our previous estimate of about 1.1 billion yuan, better than the 900 million yuan unanimously expected by Bloomberg. The new game is expected: at present, there are 5-6 new games planned to be released in 2024, focusing on the reset version of "Magic Domain", the overseas version of "final Oath" and the overseas version of "Blade of Soul".

Valuation: considering the short-term revenue and profit pressure of education business, we will not consider the contribution of education business valuation for the time being. We will adjust the valuation to 2024 and maintain the target price of HK $20 based on 5 times 2024 game business price-to-earnings ratio. However, the spin-off and listing of the education business may have a positive impact on the company's cash reserves and valuation, and the game business is expected to perform steadily and maintain buying.