Key points of investment

Game performance remains stable, and the launch of new games is expected to increase revenue:

In the first half of the year, the company's game business revenue of 1.15 billion yuan increased 2.1% year on year, game MAU of 13.269 million people fell 13.5% year on year, and online game MPU of 1.389 million people fell 9.2% year on year, mainly because the company's game products “Sausage Party” and “RO Ragnarok” were in the latter stages of the life cycle, so the number of users declined, which led to a decline in turnover. The company said that the turnover of old products may continue to decline in the future, but it is at a manageable level.

After the release of version numbers was normalized, demand from game advertisers recovered:

In the first half of 2023, the company's information service business had impressive revenue performance, achieving revenue of 603 million yuan, an increase of 28.96% over the previous year. On the one hand, it benefited from the company's continuous upgrading of the technical architecture of the TapTap platform and the in-depth application of AIGC functions, which empowered a large number of content creators and further expanded the company's content ecosystem. Furthermore, the company continued to improve the efficiency of the TapTap platform game distribution and advertising system. The conversion rate and effectiveness of the company's customer reputation continued to improve.

iOS opens up the third-party app market, and the company will get development opportunities:

According to Apple's 10-K filing with the SEC, Apple expects to make major changes to the App Store by March 2024 to allow third-party app stores to use it in the European market. We expect that in addition to Europe, Apple will gradually open up third-party app stores in all regions of the world as anti-monopoly policies are introduced in various countries. As the largest game-related social networking platform in China, the company is expected to reach Apple users in China and Southeast Asia through third-party app stores, creating new revenue streams.

Give a “buy” rating:

The company is a leader in the Chinese game market. New games have performed well, Taptap users and the level of commercialization continue to improve, and future business development is promising. The game and Taptap businesses were given 10 times PE and 3 times PS valuations corresponding to 2023, respectively. The corresponding company's reasonable valuation was HK$7.42 billion, so the company was given a target price of HK$15.5 and given a “buy” rating.