The adjusted net profit in 2023 turned a loss into a profit, optimistic about the performance of new game launches, and maintained a “buy” rating
The company achieved operating income of 1,916 billion yuan in 2023 (-29.9% YoY), realized net profit of 556 million yuan (loss decreased by 77.68% year on year), gross margin in 2023 was 37.3% (+1.3 pct year over year), and adjusted net profit was 140 million yuan (year-on-year loss turned into profit). 2023H2 achieved operating revenue of 795 million yuan (-41.22% YoY, -29.06% YoY) and net profit of 597 million yuan (loss decreased by 73.92% year on year and increased by 1566.62% month on month). The decline in 2023H2 revenue was mainly due to the company's termination of some non-core businesses such as games and offline derivatives. The year-on-year increase in profit was mainly due to (1) increased gross profit due to (1) increased revenue from core games and increased revenue from its own channels; (2) reduction in operating and management expenses. Based on game expectations, we lowered 2024-2025 and added a 2026 profit forecast. The company's net profit for 2024-2026 is estimated to be 4.73/5.45/6.21 billion yuan (previous value was 5.29/702) billion yuan, respectively, corresponding EPS 0.3/0.3/0.4 yuan, and the current stock price corresponding PE is 7.9/6.8/6.0 times, respectively. We are optimistic about the company's new game performance and maintain the “buy” rating.
Expense rates have been greatly optimized, and the company's profitability is expected to improve
The company's sales expense ratio in 2023 was 12.0% (down 29.4 pct year on year), mainly due to diversified and refined operation of “Honor All Star” customer acquisition channels, and sales expenses were reduced; the R&D expenses rate was 12.5% (up 0.3 pct year on year), and R&D expenses fell 24.05% year on year to 240 million yuan, mainly due to the gradual maturity of businesses such as “Calapicchu” and Fanbook, the gradual reduction in R&D investment, and the improvement of internal workflow efficiency with AIGC technology. We believe that as the company focuses on the main game business and effectively controls expenses, the subsequent launch of new games will lead to an increase in turnover, which is expected to drive an improvement in the company's profitability.
Revenue from old games grew strongly. Following the launch of the “Carapicchu” mobile game and “Operation Delta”, the company's old games were revitalized. The 2023 revenue of “Dream Garden” and “Dream Home” increased by nearly 50% compared to 2022. In terms of new games, “Operation Delta” is expected to be launched on multiple terminals in 2024Q4, and the “Carapicchu” mobile game is expected to be launched domestically in the second half of 2024. In March 2024, the company signed a memorandum of understanding with Saudi cloud computing company SCCC to cooperate or help “Kalapicchu” expand in the Middle East and other overseas regions. The company has a variety of successfully self-developed products and global operation capabilities, and has Fanbook, a game community with more than 10 million users. The launch of the “Carapicchu” mobile game and “Operation Delta” is expected to contribute to a considerable increase in the company's performance.
Risk warning: New game launch performance falls short of expectations, fee rate control falls short of expectations, etc.