Incident: Zhejiang Digital Culture released its 2023 three-quarter report. During the reporting period, the company achieved total operating income of 2,288 million yuan, a year-on-year decrease of 41.85%, net profit of 692 million yuan, an increase of 92.17% over the previous year, and net profit after deduction of 605 million yuan, an increase of 19.52% over the previous year. Net operating cash flow for the first three quarters of 2023 was 518 million, down 20.21% year on year.

Comment: Revenue declined month-on-month due to the contraction of the online social networking business. Is Fuchunyun and Wingman's game business expected to be relatively stable? 1) Gaming business: The company's revenue for the third quarter was 599 million dollars, down 21.7% from the previous month. We expect this part of the decline was mainly due to the contraction of the company's social business line. The simultaneous decline was also the company's operating costs. The quarterly operating cost for the third quarter was 155 million, down 29.9% from the previous month, mainly due to the decline in share due to the contraction of the social business line. Wingman is gradually increasing its investment in board games in mini-programs. Mini-programs such as Wingman's “Wingman Whipped Eggs” and “Guangdong Mahjong” operated well in 2023, and the board game business remained steady.

2) IDC business: The company has launched IDC business through Fuchun Cloud Technology. It has now basically built more than 10,000 sets of cabinets, mainly providing infrastructure construction and operation services, and is also focusing on opportunities in AI computing power leasing.

3) Big data trading center business continues to advance. The Big Data Trading Center has now launched 2 industry zones: an international data trading zone guided by the Provincial Department of Commerce; an industrial data transaction circulation zone guided by the Provincial Department of Economics and Information; 6 regional zones: Ningbo, Wenzhou, Huzhou, Yiwu, Xinchang, Yuhang, etc., and the Ningbo Zone was officially launched on the trading platform on October 14, 2023, and the first transaction has been completed.

Sales expenses were drastically reduced: 2023Q3 sales expenses in a single quarter were 62 million dollars, down 30.4% year on year, sales expenses were 10.4%, down 8 percentage points from Q2. The decline in the cost rate is expected to be mainly due to the narrowing of social services; Q3 management expenses were 118 million, down 9.4% year on year, and the management expense rate was 19.7%, up 5.3 percentage points from Q2. The increase in management expenses is expected to be mainly due to amortization of new office buildings; Q3 R&D expenses were 99 million, down 8 percentage points from year to year 21.5%, R&D expense ratio is 16.5%.

Profit forecast and valuation: Considering the rapid contraction of the company's social networking business and fluctuations in investment income, the company's annual revenue and profit expectations were lowered. The company's revenue for 2023-2024 is estimated to be 2,928 billion (previously 3,503 billion) and 3.307 billion (previously 3,824 million), up -44% and 13% year on year, with net profit of 754 million ($896 million) and $815 million (previously 957 million), respectively, up 54% and 8% year on year. The current market value is 19.7x and 18.3x corresponding to 2023 and 2024 PE, maintaining the “buy” rating.

Risk warning: 1) Stricter game regulation policies; 2) The risk of information and data used in research reports not being updated in a timely manner.