Incident: Zulong Entertainment disclosed 2023 results. In 2023, the company achieved operating income of 909 million yuan (yoy +55.5%); net loss of 316 million yuan (yoy -58.9%) during the year; and adjusted net loss of 283 million yuan (yoy -61.3%).
Core new products have driven rapid revenue growth in 23 years. The three new products are poised to be launched. They are expected to contribute significant increases and focus on turning points in the company's business model. In 2023, the company achieved revenue of 909 million yuan, an increase of 55.5% over the previous year. Driven by the release of large individual products, the company's comprehensive game distribution and operation business revenue was 709 million yuan, an increase of 105.4% over the previous year. In March 2023, the company's self-developed spontaneous project “In the Name of Shining” was launched in mainland China, with impressive results: by the end of 2023, the game had accumulated more than 12 million registered users; by the end of March 2024, the game's cumulative global turnover had exceeded 1 billion yuan. We believe that the success of “In the Name of Shining” has verified Zulong Entertainment's ability to self-publish and has become a turning point in the company's integrated R&D and operation model. The company is rich in reserve projects, and many of these products are expected to be launched through self-distribution, or continue to contribute considerable revenue.
In terms of new product reserves, the company is expected to launch three products in 2024, namely: 1) The SLG game “Legend of the Three Kingdoms Heroes: Legend of Honghu” (version number obtained) based on the “Legend of Heroes of the Three Kingdoms” IP. Considering that the SLG game “Under Hongtu” previously launched by the company was successful (over 100 million yuan in the first month, cumulative sales volume exceeded 1.6 billion yuan by the end of 2023), and the successful experience of the SLG category can be replicated in subsequent products. We think the product's performance is worth looking forward to; 2) “Dragon Family” IP strategy created based on UE4 card The card game “Project E” completed a new round of testing in January 2024. This test version was refined and upgraded in terms of art, plot, etc., and received a large amount of praise. Based on the “Dragon Clan” IP audience, and the scarcity of high-quality card games based on UE4, we are optimistic about the product's contribution to the company's profit after launch; 3) The Chinese-style RPG mobile game “Project Code: IM” based on UE4 has completed a new round of testing in January 2024, and is expected to be launched within the year through self-release.
Furthermore, looking through the company's product reserves, we found that the company's new products to be launched, such as “Project E” and “Project Code: IM”, etc., all began production around the beginning of 2022. The production cycle is about 2 years. They are relatively lightweight products. There is a big difference from the input-output model of the company in previous years where the main focus was on the MMO and SLG categories, which had a long production cycle and large investment volume. We are optimistic that the company is becoming more and more flexible in terms of product performance.
The cost side has been optimized, and it is expected that the loss will be reversed in 2024. The company's gross margin is relatively stable, and the cost control effect is good. In 2023, the company's R&D expenses decreased by 22.0% year on year to 582 million yuan, sales expenses were still reduced by 2.2% year on year to 275 million yuan when large self-issued products were launched, and management expenses decreased 2.9% year on year to 105 million yuan. The company reduced losses significantly in 2023. We believe that if the pace of new product launches and sales performance in 2024 meet expectations, the company is expected to turn a loss into a profit.
Profit forecast and investment rating: We expect revenue for 2024-2026 to be $12.1/13.3/1.48 billion, up 33.6%/9.5%/11.5% year-on-year, and net profit of 0.1/0.64 to 127 million yuan, respectively, corresponding PE 103/16/8 times. We are optimistic about the company's game development barriers and ability to launch premium games, as well as the increase in monetization value of game products in the context of increasing self-publishing capabilities and technological progress, and maintaining a “buy” rating.
Risk warning: Game development progress falls short of expectations; industry policies are getting stricter; new product sales performance falls short of expectations; macroeconomic recovery falls short of expectations.