Revenue in '23 increased 18.15%, and net profit to mother increased 294.1% year over year, maintaining a “buy” rating

The company released its annual report for the year 23: revenue of 3.308 billion yuan, an increase of 18.15%; net profit to mother was 513 million yuan, an increase of 294.1%. Gross margin reached 52.1% in '23, an increase of 14pct. The increase in performance was mainly due to the company's vigorous expansion of markets such as the Middle East and North Africa, the rapid growth of new social products, and Blue City Brothers, which contributed about 160 million yuan in profit in Q3. We expect net profit of 4.51/5.5/645 million yuan for 24-26, EPS of 0.38/0.46/0.54 yuan. Compared with the company Bloomberg, the average PE value for 24 years is 12X. Considering that Tencent Holdings has a valuation premium as the industry leader, we give the company 8X PE for 24 years, corresponding to a target price of HK$3.31 (previously HK$2.91), maintaining a “buy” rating.

Social business: Latecomer products are rapidly rising, and the Middle East and North Africa market space has further opened up social business revenue of 3.0 billion yuan (including social networking services for diverse groups). Among them, the business scale of core products (Mico, YoHo, TopTop, and Sugo) in the Middle East and North Africa region increased 30.0% year over year (exchange earnings also contributed). In '23, the company optimized and upgraded social products. Mico upgraded and revised the Middle East market to increase community activity and user size, and profits further increased; YoHo strengthened content operation and localization strategies to improve the level of refinement of user operations; Sugo improved matching strategies, and the number of monthly active users, revenue and profit increased more than 3 times year on year; TopTop improved the user growth system and increased community rewards. Product revenue also increased 2 times, and profits increased 6 times. Since August, the company has had 3 social networking products in the top 30 of data.ai's “China's Non-Gaming App Overseas Revenue List” for five consecutive months.

Multi-person social networking business: Overall, continuous profit. The overseas brand HeeSay launched a new upgrade in August '23. Products such as Blued and Finka were incorporated into the company's global social networking product matrix, and the company's social networking business layout was further expanded. In response to the needs of the LGBTQ+ community, the company launched a newly upgraded online community, HeeSay, to take on Blued's international user and brand potential. HeeSay not only provides traditional dating functions, but also introduces various interactive methods such as post, live streaming, and audio rooms to meet the needs of users to show themselves, share their lives, and have fun together. With the company's ten years of experience in overseas markets, HeeSay has excelled in refined operations and commercial monetization, and is now profitable.

Innovative business: A breakthrough has been achieved in the scale of flagship games, and the game layout is expected to further expand the revenue of the innovative business by 336 million yuan, an increase of 38.6%. The company focuses on boutique games, etc., and uses a self-developed intelligent game development engine to launch boutique games such as “Alice's Dream: MergeIsland”. “Alice's Dream: MergeIsland” was widely recommended on the Google App Store due to its innovative gameplay and exquisite art design. Over the past 23 years, its sales volume has continued to grow. It has grown into the leading product in the global Merge category, and has been at the top of the “China Mobile Game Overseas Revenue Growth Ranking” and “Chinese Mobile Game Overseas Download List” published by SensorTower several times. Furthermore, the company's game team is steadily incubating new products, and has been incubating new products such as the synthetic mobile game “Taylor's Secret”, “MergeCove”, and the sudoku game “Sudoku” in 23 years, and the game landscape is expected to expand further.

Risk warning: Overseas social media competition is fierce, and the monetization of innovative businesses falls short of expectations.