Key points of investment
Incidents: The company disclosed its report for the third quarter of 2023. 23Q3 achieved net profit of 467 million yuan after deducting net profit of 467 million yuan, 2023Q3, the company achieved operating income of 3,737 billion yuan, an increase of 38.89% over the previous year; realized net profit attributable to shareholders of listed companies was 561 million yuan, up 174.58% year on year, and net profit after deduction was 467 million yuan, up 181.59% year on year. We believe that the driving force behind outstanding performance is mainly due to the increase in the contribution of popular products from overseas interactive products. 2023Q1-Q3 achieved operating income of 9.787 billion yuan, up 7.06% year on year, and net profit after deducting net profit of 1,429 billion yuan, up 107.18% year on year.
The revenue of Diandian Interactive's new games increased rapidly. In September, it was ranked 3rd in the overseas revenue list of Chinese game makers, and overseas Diandian Interactive was frequently popular, ranking in the top 3 of the overseas revenue list of Chinese game manufacturers in 8/9, 2023. According to Sensor Tower data, two SLG games with frozen themes developed by DotDot Interactive have performed well in overseas markets. Among them, “Frozen City” (Frozen Age), from its launch in December 2022 to July 2023, total overseas revenue exceeded 32 million US dollars, and “Whiteout Survival” (Frost Apocalypse) ranked in the top 5 of China's mobile game revenue list for 8/9, 2023. Furthermore, the simulated mobile game “DragonscapesAdventure” (Adventures in Dragon Island) ranked in the top 30 in the revenue list of overseas mobile games in China in 8/9, 2023. We believe that DotDot Interactive's various products have become popular, demonstrating its excellent game development capabilities and accurate insight into the needs of overseas users. This makes it more likely to create more popular overseas games in the future, which is expected to contribute to sustainable revenue growth.
The steady operation of Shengqu Gaming in China. While maintaining the advantages of the MMO category in mobile games, the company has vigorously expanded its layout into new categories; for computer games, the company has rich IP reserves, including “Legend of Hot Blood”, “Dragon Valley”, “Legendary World”, “Rainbow Island”, “Age of Heroes”, “The Age of Heroes”, “Fury”, and “Warriors of Light.” We believe that the company's game products have a long life cycle, high user stickiness, and a sustainable and stable contribution to revenue.
Legendary IP signed an authorized contract to promote the unification of the legendary market in mainland China. According to the company announcement, the subsidiary Altos signed a “Legend 2 and Legend 3 Game Cooperation Agreement” with the wholly-owned subsidiary of Entertainment Virtue on August 9, 23. The cooperation fee amount is 100 billion won per year, equivalent to about 548 million yuan, and the cooperation period is not more than 5 years. The wholly-owned subsidiary of Entertainment Virtue will grant Actoz exclusive, non-transferable, and sub-licensable rights to the legendary IP in mainland China. We believe that the successful signing of the exclusive license of this “Cooperation Agreement” will greatly promote the company's unification of the “Legend” market in mainland China, and the increase in performance brought to the company may be further reflected.
Deeply lay out cloud data services and transform from IDC to AI+IDC
The company has deeply deployed cloud data services, accelerated the construction of computing power infrastructure, and transformed from IDC to AI+IDC.
1) On the customer side, the company promotes cooperation with manufacturers such as Tencent and Huawei in an orderly manner. The subsidiary Century Longteng signed a strategic cooperation agreement with Tencent Cloud Computing to develop strategic cooperation in the fields of data center business, industrial park cooperative development, government cloud computer room cooperation, government cloud business development, 5G edge computing center business cooperation, server procurement business, etc., to create value-added services around the computing power industry chain; Huawei and subsidiary Century Longteng signed a framework cooperation agreement to cooperate in cloud data center business, data center infrastructure, intelligent photovoltaics, green energy storage, and comprehensive smart energy management to accelerate the construction of green data centers; 2) In terms of new business strategies, the company and Litong Electronics set up a computing power joint venture. Its main business is to provide AI computing power leasing services; 3) In terms of computing power infrastructure, the first batch of dozens of GPUs has arrived according to recent investor questions and answers. We believe that in the wave of the AI industry, the company is expected to further enhance the company's competitiveness in the digital industry.
Profit forecasting and valuation
We expect the company's revenue for 2023-2025 to be 137.18/171.69/20.403 billion yuan, up 19.54%/25.16%/18.84% year on year; net profit attributable to parent company shareholders is 20.24/26.73/29.72 billion yuan, 2024-2025, up 32.09%/11.16% year on year; EPS is 0.27/0.36/0.40 yuan, respectively, closing price on November 7, 2023. The corresponding PE is 22.43/16.98/15.27 times
We believe that 1) considering that the company's domestic game business has many well-known IPs, including the Legends series, the Legend World series, and the Dragon Valley series, and has historical experience in long-term operations and frequent hits, and the company's overseas business development market performance is good, giving a certain valuation premium. With the continuous launch of the company's domestic and overseas reserve products, it is expected to drive accelerated performance; 2) the company's recently signed “Legend 2 and Legend 3 Game Cooperation Agreement” is expected to promote the unification of the “Legends” market in mainland China, or increase the company's performance; 3) the company's accelerated computational power building Infrastructure is expected to further enhance the competitiveness of the digital industry in the AI industry wave, contribute to a certain increase in performance, and maintain a “buy” rating.
Risk warning
Risk of industry policy changes; risk of game version application; risk of loss of core talent; new game launch performance falls short of expectations; business progress such as cloud data and computing power falls short of expectations.