Overview of events

On August 30th, Dream World issued the interim results announcement of 2023, the company achieved revenue of 1.121 billion yuan (yoy-18.88%) in the first half of 2023, profit of 41 million yuan during the period, and profit of 202 million yuan during the adjusted period, which turned losses into profits compared with the same period in 2022.

Analysis and judgment

The performance is in the forecast range, in line with expectations, revenue decreased year-on-year, but the share of core game revenue increased steadily, net profit and adjusted net profit turned into profit year-on-year.

1. Revenue side: focus on key games, and core game revenue is growing steadily. The company's 23H1 revenue is 1.121 billion yuan (yoy-18.84%), of which the revenue of game business, information service business and IP derivatives service (non-sustainable operation) is 1.065 billion yuan (yoy-17.08%), 41 million yuan (yoy-15.62%) and 11 million yuan (yoy-72.71%), accounting for 95.0%, 3.6% and 1.0% respectively. The decrease in game revenue is mainly due to the fact that the company focuses on key boutique games and further reduces non-key game operations, resulting in a decrease in non-key game operation revenue, but a steady increase in core operating game revenue; information service revenue mainly comes from advertising business, and the reduction in revenue in this sector is mainly due to the company's active adjustment strategy to reduce in-application advertising to enhance user experience. In addition, the company spun off its IP derivatives business in February 2023, and the impact of its operating losses on profits was reduced.

2. Cost side: the channel cost is reduced, the cost is reduced and the benefit is obvious. The operating cost of the company's 23H1 is 616 million yuan (yoy-21.39%), which is mainly due to the continuous deepening of user operations carried out by the company through Fanbook, the increase in revenue from its own channels, and the decrease in the proportion of games promoted through channels, resulting in a reduction in channel costs. The company's 23H1 sales and marketing expenditure is 115 million yuan (yoy-73.0%), which is mainly due to the company's continuous improvement of customer acquisition efficiency and fine operation, while the general and administrative expenditure of 43 million yuan (yoy-51.0%) is mainly due to the company's optimization of the group's internal organizational structure, increasing the focus of the front-end business and achieving scientific cost reduction and efficiency improvement. Research and development expenditure of 142 million yuan (yoy-23.2%), a small decline is mainly due to the company focused on the development of key games, sealed part of the research projects.

3. Profit side: 23H1's gross profit margin is 45.11% (yoy+1.78pct), achieving a small increase, net profit, adjusted net profit to turn losses into profits. In addition, the net cash inflow of the company's 23H1 operating activities was 246 million yuan, an increase of nearly 100 times compared with 2.44 million yuan in the same period in 2022, indicating the steady growth of the company's existing core game business, superimposed new games have been launched one after another, and the company's profitability and cash ability are sound.

The basic set of boutique games grew steadily, "Metro parkour", "Dream Garden" and "Dream Home" grew strongly, and the performance of "Glory all-Star" was strong. The company is committed to building "Metro parkour" into a leisure competitive game with three attributes of leisure, competitive and social, and continues to launch play modes such as "match", "body training ground" and "chaos". Further enhance the stickiness of users. "Dream Garden" and "Dream Home" communicate with core users with high frequency and close range through Fanbook, accurate iterative products to meet the deeper emotional experience demands of female users, and daily active users, paying users and payment rates reach new highs. In particular, the theme version of Jiangnan water village launched by "Dream Garden" this summer, the number of daily active users and paying households have both increased against the trend compared with the same period in 2022. The online hours of users inside and outside the game of "Glory all-Star" increased significantly in the first half of the year, and the company launched a series of preferential activities in the community to promote users' ice-breaking consumption and form the habit of continuous consumption in Fanbook Mall, effectively improving product profitability and operating cash flow, and once again achieving a steady improvement in income quality.

Self-developed game gradually high-quality delivery, performance increment is expected to gradually release. The self-developed game "Karabichu", which has attracted much attention from Chuangmeng, is the first competitive shooting game with "string" play + two-dimensional theme in the industry. PC will not delete its files on August 3. The game has been online for only 4 hours, and Bilibili Inc. players have created more than 10 pages of content, which has been on the popular search list of Station B. in less than half a day, the total number of live broadcasts between Bilibili Inc. and DouYu International Holdings Limited has exceeded 3000, ranking high in the Top2 of HUYA Inc. 's game hot search list. Less than a month after its launch, Karabichu's average weekly active users reached 700000. So far, the ARPPU of paid users has exceeded 200, and the average daily playing time of users has exceeded 120 minutes.

In the future, the team will update and iterate the game around the three directions of game theme iteration, role richness and season activities, and mobile games and overseas versions are also in the process of steady progress. The other two self-developed reserve games are "two countries: staggered World" (2022.12) and "Delta Action" (2023.7). Among them, "two countries: staggered World" is a Ghibli-style fantasy adventure RPG mobile game. At present, the national service version is jointly developed by Tencent and Dream World, with a large number of new national service exclusive content and high product completion. 23Q3 is expected to carry out paid testing. "Delta Action" is a multi-play shooter game based on special agents / teams, jointly developed by Mengtiandi and Tencent, and exclusively released by Tencent in Chinese mainland region. A global appointment has been opened on August 23 and will be launched in the future.

The company creates a community user management tool, Fanbook, to drive product growth with the user community.

Fanbook has been independently developed and polished by the company for 3 years, mainly based on the channel to solve community operation problems. At present, the three cores of Fanbook are: working with users to do research and development, community word-of-mouth to promote growth, and embracing AI to improve efficiency. In the first half of 2023, the transaction volume of Fanbook in game props and surrounding areas exceeded 100 million yuan, and more than 2000 new communities were added, especially more than 4000 new communities in July-August. We expect that the growth rate of new communities in the second half of the year will greatly exceed that of the first half of the year. By the end of June 2023, there were 10 Fanbook communities with more than 1 million people, 22 communities with 100000 people, and more than 100 communities with 10,000 people. In addition to regular functions and content creation, the community is also providing tools and functions such as AI painting, record query, game team formation and so on. We believe that at a time when the cost of new user traffic continues to rise, Chuangmeng seeks new growth points on user retention and LTV. Fanbook directly targets the Chinese version of Discord, which is expected to open the space for private domain traffic, and the platform to support the operation and growth of 10 million-level users shows its strong social fission ability.

Investment suggestion

The company's agent games contribute to stable cash flow, while self-developed games gradually usher in the harvest period, and have Fanbook, a community user management tool that supports the operation and growth of tens of millions of users, with high performance flexibility and platform scarcity. We expect the company to achieve net profit of 201 million yuan (yoy+108.1%), 317 million yuan (yoy+57.5%) and 401 million yuan (yoy+26.6%) from 2023 to 2025, respectively, and the corresponding EPS is 0.13,0.20,0.25yuan respectively. The current share price corresponds to 24 times, 16 times and 12 times the valuation, maintaining the "buy" rating.

Risk hint

The risk of stricter regulation in the industry, the risk of intensified competition in the industry, the lower-than-expected risk of issuing version numbers, the lower-than-expected risk of running water, and the lower-than-expected risk of new business development.