2H23's performance was in line with the profit warning, slightly lower than our previous forecast that FY23 fell 31% to revenue of 1,056 million yuan, in line with the forecast of 1.04 to 1.07 billion yuan; loss of 138 million yuan during the year (net profit of 22-year net profit of 25.11 million yuan), in line with forecast loss of 130 to 150 million yuan; and net loss to mother of 132 million yuan. Among them, 2H23's revenue fell 38% to 436 million yuan; during the year, loss was 57.18 million yuan (2H22 profit of 98.07 million yuan), and net loss to mother was 62.46 million yuan. Overall, it was slightly lower than our expectations. Our judgment was mainly due to: 1) “Floating Memories” (launched on 2024/1/2, later called “Ling Long”), some marketing expenses were confirmed before 2H23; 2) expenses such as employee remuneration at the end of the year were slightly higher than expected.

Development trends

2H23 game streaming of existing apps has naturally declined, and some applet versions are gradually being launched. The company's 2H23 revenue fell 30%/38% in the same period. According to Qimai, 2H23 “Born to Live as a Song” and “Ling Yunnuo” ranked an average of 102/133 on the iOS game bestseller list in mainland China, down 53/61 and 28/36 respectively. We judge that, on the one hand, the company's game stock naturally declined as the life cycle changed; on the other hand, the domestic market in 2023 was more abundant in the supply of new games, which may have had an impact on the company's old games to a certain extent. Additionally, we are aware that the WeChat mini-game versions of “Ling Yunnuo” and “The Legend of Xi Fei Q” have been launched, and there may be certain turnover benefits.

New travel marketing expenses were placed at 2H23 slightly earlier, and personnel were optimized and adjusted, and year-end incentives increased expenses. The company's 2H23 sales expenses fell by 13%/44%. We judged that “Durala's Promotion Diary” had a low impact, but at the end of the year, the new tour “Ling Long” launched a product promotion, and sales expenses were raised. 2H23 R&D expenses also decreased by 1% and the environment increased by 16%. We believe this is partly due to the impact of expenses such as year-end employee remuneration bonuses and personnel optimization adjustments at the end of the year.

The company also indicated at the performance conference that it is still in the process of optimizing personnel, and is also carrying out internal performance reforms (implementing phased assessments, restructuring marketing strategies, deepening equity incentives, etc.) to better stimulate innovation.

“Ling Long”'s January launch performance was basically in line with expectations. Follow-up attention will be paid to mini-games and diversified reserves. According to Qimai data, up to now, “Ling Long” is ranked 39th in the iOS game best-selling list in mainland China in a single day, with an average ranking of 50~70th. We believe that “Ling Long” uses three-dimensional marketing strategies such as endorsements, online purchase volume marketing, large offline screens, and cultural tourism linkages, which is expected to strengthen the stickiness of core users, and it is recommended to focus on long-term performance. In addition, the company said it already has reserve games “Mojian Jianghu” (with version number; the company said it is expected to be launched this summer), “Reign of Destiny” (an aerial background of the European royal family, currently being tested in North America, Southeast Asia, etc.), and creative projects. It is recommended to keep an eye on the progress of the product launch.

Profit forecasting and valuation

Net profit returned to mother in 24/25 was reduced by 34%/27% to 140.180 million yuan due to lower than expected sales performance of some games. The current share price corresponds to 14/10 times 24/25 P/E. Maintaining an outperforming industry rating, the target price was lowered by 32% to HK$1.07 (15 times 2024 P/E) due to adjustments in profit forecasts, with 7% upside.

risks

The performance of new games fell short of expectations. The flow of online games declined, macroeconomic downturn, industry regulatory policy risks, and liquidity risks.