FY23's performance is in line with the previous profit warning range, and revenue is in line with our expectations that the company's FY23 revenue will increase 44% to 906 million yuan, in line with our expectations; non-IFRS net loss of 37.37 million yuan (FY22 profit of 50.7 million yuan) is slightly lower than our previous small profit forecast. Among them, 2H23 had revenue of 572 million yuan and non-IFRS net loss of 78.85 million yuan (we had anticipated a loss of 35.52 million yuan). We believe that the main reasons are: 1) the impairment of some equity investments and advance payments to some investment companies affected profits; 2) the centralized marketing and promotion expenses generated during the game product promotion phase were slightly higher than expected.

Development trends

Various new tours/regions contributed to increased turnover, and 2H23 revenue grew at a high year-on-month rate. The company's 2H23 revenue increased 58%/71%. Among them, the authorized product portion of 2H23's revenue increased from 2H22's $11.31 million to 2H23's $285 million. We believe it is mainly driven by newly launched products such as “Legend of Sword and Fairy” (launched 2023/6/9, with annual revenue of 288 million yuan) and “Magic Card Girl Sakura” (launched in mainland China/Hong Kong, Macao and Taiwan regions respectively in September/October 2023, with global revenue of 63.28 million yuan during the year). At the same time, it also contributed to the increase in sales volume in regions such as “The Strongest Snail” in Europe and the US in the second half of the year.

Concentrated marketing expenses and investment/advance payment impairment affect profits, and management/R&D expenses are better controlled. In terms of expenses, the company's 2H23 sales expenses increased by 432%/149% to 306 million yuan. We believe that it was mainly due to some of the game product promotion stages mentioned above, centralized marketing and promotion expenses. 2H23 management/R&D expenses were 27.779/60.82 million yuan respectively, a year-on-year decrease of 9%/an increase of 5%, respectively, which was less than our expectations. We believe that the relevant employee bonuses were reduced compared to the same period, mainly due to the company's effective control of expenses. Due to the impact of the external environment, the company's investment in some game industry chain companies and advance payments to some investment companies were reduced. Among them: 1) changes in fair value corresponding to the investment had a loss of 15.59 million yuan in 2H23 (2H22 contributed 25.58 million yuan), 2) other cost items in operating costs (mainly the impairment of the aforementioned advance payments and outsourced technical service fees, etc.) 2H23 increased to 42.06 million yuan. Previously, they were all in the amount of one million yuan.

The product reserves are diverse and rich. FY24 focuses on the profit release of new games, mini-games, and overseas performance. In terms of the next new tour, the focus is on “The Strongest Snail” overseas profit recovery situation. In terms of minigame-related business, the company has three main paths: 1) launching mini-game versions based on existing app products; 2) self-developing or proxy new minigame products, such as “Royal Guard” (agent)/“Bullet Army” (self-developed); 3) acting as an agent in the form of domestic mini-game apps (for example, “Fat Goose Gym” launched in Japan at the end of February and is currently in the top six of Japan's free iOS game lists. The company's results show that it has explored a relatively effective operating path). Stay tuned for mobile app games to be launched: “Ares Virus 2”, “Knights Rush”, etc.

Profit forecasting and valuation

Considering the uncertain pace of some new product launches, the 24/25 non-IFRS net profit was reduced by 13.5%/13% to 171/223 million yuan. The current share price corresponds to 14/10 times 24/25 non-IFRS P/E. Maintaining an outperforming industry rating, the target price was lowered by 14% to HK$4.2 (15 times non-IFRS P/E in 24 years) due to adjustments in profit forecasts, with an upward margin of 8%.

risks

Game launch progress or turnover falls short of expectations, single product dependency risks, macroeconomic downturn affects entertainment spending, industry regulatory policy risks, and liquidity risks.