FY23 results fell slightly short of our expectations
The company's FY23 revenue also fell 1% to 3.4 billion yuan. Adjusted net loss to mother was 34.12 million yuan (FY22 loss of 482 million yuan), lower than our expected profit of 40 million yuan. Among them, 2H23's revenue fell 11% to 1.6 billion yuan, with an adjusted net loss of 147 million yuan. We think the main reason is that gaming revenue was slightly lower than expected.
Development trends
Game business: 2023 ended smoothly, and some of the new game's profits may be gradually released in 2024; a “good start” in 2024, the overseas sales volume of “Let's Go Muffin” exceeded expectations, and we are watching the progress of the launch of the national service.
Delayed turnover and natural decline in old products affected 2H23 revenue. 2H23's game revenue was 940 million yuan, down 29%/18%. We think the main reasons are: 1) the “Sword of the Suzuran” national service was launched in November 23, and delays in sales during the year confirmed an impact on revenue; 2) the “Sausage Party” sales volume naturally declined year-on-year.
We judge that the company's sales rate in the second half of the year also increased by 4ppt to 32.7%, partly due to current confirmation fees and misallocation of income and expenditure for the new game promotion. We estimate that this portion of the profit may be recovered in 2024.
“Muffin” has boosted 1H24 revenue overseas and is watching the progress of the national service. “Let's Go Muffin” has continued to be at the top of the local bestseller list since it was launched in Hong Kong, Macao and Taiwan at the end of January. We estimate that the average monthly turnover for the first two months was around 100 million yuan, far exceeding previous market expectations. We think it is mainly due to the team's deep cultivation of gameplay, choosing a better launch and operation window, and capturing the mentality of local game users. The company's results will indicate that its national service will be launched in mid-May. Additionally, 3 games are in the development phase. We recommend paying attention to: 1) the “Muffin” national service, continuity of flow in Hong Kong, Macao and Taiwan regions, and launch plans in other overseas regions; 2) the “Suzuran” 2H24 overseas launch plan.
TapTap business: Achieving high revenue growth due to market demand and improvements in its own system efficiency, MAU picked up in the second half of the year, and cost optimization boosted gross profit margins.
The number of users returned to the upward channel, and the 4Q23 average MAU increased year over year. 2H23 information service revenue also increased 36% to 690 million yuan. In 2023, the average MAU for the Chinese version fell 14% to 35.81 million, up from 33.97 million in 1H23. The company announcement stated that the average MAU for 4Q23 surpassed 4Q22. We believe that the company's current adjustments to the platform's user acquisition and operation strategy are relatively effective.
2H23's gross margin hit a three-year high, driving profit release. 2H23 gross margin rose to 86.2%, up nearly 10ppt year over year. The company stated that it mainly optimizes TapTap server and loan costs, reduces costs per user, and increases gross margin.
Continue to reduce costs and focus on increasing production capacity. 2H23 R&D rates were also reduced by 4ppt to 30%, annual R&D expenses fell 21% to 1 billion yuan, and R&D personnel fell 14% to 1,031 at the end of the year. We believe that the company is effective in restructuring game projects and optimizing personnel, and production capacity is expected to achieve a stronger focus.
Profit forecasting and valuation
Maintain the net profit forecast to mother unchanged. The current share price corresponds to 24/18 times 24/25 P/E. Maintaining an outperforming industry rating, we raised our target price by 54% to HK$18 (27 times the 2024 P/E), taking into account the company's recent progress in self-developed games exceeding expectations, and the development of community+gaming two-wheel drive, with a valuation premium.
risks
Industry regulation and market risks, game launch progress and performance fell short of expectations, TapTap user growth slowed down and commercialization process fell short of expectations, and competition in overseas markets intensified.