The annual dividend rate was over 16%, and NetDragon (00777)'s generous dividend payout attracted widespread attention from investors.

The Zhitong Finance App learned that NetDragon recently released its 2023 financial report, achieving revenue of 7.1 billion yuan, of which the game and application service business maintained a growing trend, with revenue of 4.19 billion yuan, an increase of 6.6% over the previous year, accounting for 59% of total revenue. Furthermore, the company's profit is stable, with gross profit and net profit of $4.4 billion and net profit of $550 million respectively. It also plans to pay a final dividend of HK$0.4 and a full year dividend of HK$1.8, with a dividend ratio of up to 16.4%.

In fact, NetDragon uses “education+gaming” as a two-wheel drive development strategy, and maintained a steady development trend in previous years. In 2023, the company will step up R&D efforts and deeply integrate the business with AI applications such as big models. Under the policy guidance of new quality productivity, it will accelerate product iteration and scenario application. At the same time, the company actively shares the company's development results with shareholders and investors through steady dividends.

NetDragon's generous dividend payout is one of the few investment targets of Hong Kong stocks that insist on paying dividends twice a year. So under high dividend rates, is the company worth entering the market?

Two-wheel drive, gaming business hits a new high

The Zhitong Finance App learned that NetDragon has maintained a strong performance growth trend. It has maintained double-digit compound growth over the past 10 years. 2023 was affected by a slowdown in demand for overseas education, but the gaming business supported the stability of performance. In 2023, the company's education business revenue (that is, myND.ai, a spun off US independent listed subsidiary) was 2.91 billion yuan, and the game and application services business was 4.19 billion yuan, accounting for 41% and 59% of total revenue, respectively. Among them, the game business broke through record highs.

The game business accounts for about 90% of game and application service revenue, maintaining a long-term growth trend. Over the past ten years, revenue has increased 3.9 times, with a compound growth rate of 16.4%. Driven by the game business, the profitability of the game and application services business is very strong. The gross profit margin of the business was 88.5% in 2023, which remained at a high level, up 2.6 percentage points from the previous year, while the segment profit margin reached 33.4%, up 1.9 percentage points from the previous year.

The education business completed the spin-off and listing of overseas education in December of last year (NYSE) and changed its name to myND.ai. In 2023, government demand in overseas markets slowed down. Coupled with the impact of a high base, revenue declined, but in terms of an extended cycle, it also showed double digit compound growth. In 2023, Mynd.ai's profit performance was good. The gross margin was 25%, up 1.3 percentage points from the previous year, and overall classified operating expenses fell 10.8%.

In 2023, NetDragon's overall gross margin was 61.93%, up 7.08 percentage points from the previous year. However, during this period, the company increased its R&D efforts. The overall R&D expenditure ratio was 16.88%, up 4.49 percentage points from the previous year. Among them, the R&D expenses for education, games and application services were 28.31% and 6.74%, respectively, up 2.39 and 1.53 percentage points from the previous year. Overall profit was healthy. Cash flow from operating activities was 1.1 billion yuan during the period, an increase of 4.2% over the previous year.

Notably, the company maintained an excellent financial position all year round. The balance ratio in 2023 was 40.53%, and the interest-bearing debt ratio (including convertible securities and notes) was only 15.82%. In December 2023, the company redeemed convertible and exchangeable bonds with a principal amount of US$125 million, but its cash flow was still very abundant. By the end of 2023, its cash equivalent plus bank deposits totaled $2.57 billion, accounting for 24.8% of total assets.

Promote global strategies and open up market space with AI

NetDragon's “education+game” drives long-term stable and high-quality growth in performance. Specifically, through a global strategy, the game business uses PC and mobile devices to create a variety of IP products for gamers, and continuously innovate technology and develop new ways to play, so that users maintain a high level of stickiness and willingness to pay.

In 2023, the global game business expanded steadily. Overseas and domestic market revenue increased by 4.5% and 10.5% respectively, with overseas revenue accounting for 15%. It has maintained the growth trend for six consecutive years, while PC and mobile revenue increased by 11.1% and 2% respectively, of which mobile accounts for 15.7%. A variety of new products will be released in 2024, which is expected to drive the release of performance. During this period, the average game time of users and the user payment rate increased markedly.

On the product side, NetDragon has created IP explosions. Core IPs include “Magic Domain”, “Spirit Blade”, and “Conquest”. “Magic Domain” IP is the company's enduring product. Revenue increased by 12.4% in 2023, and its competitive advantage in the MMORPG game field was stable; “Soul Blade” IP regained growth and revenue increased 5.8% year over year; while “Conquer” IP continued to invest and made significant progress. During this period, development of a new game (“Code-Alpha”) was launched, which is expected to be launched in 2024.

In fact, through continuous content quality upgrades, user experience upgrades, and user service upgrades for IP games, the company maintains a high level of user stickiness, attracts external users, extends the life cycle of games, and generates more revenue. For example, “Magic Domain” introduces the zodiac beast every year based on the Chinese zodiac. Through the evolution of gameplay packaging and original IP stories, etc., the ratio of “content revenue” and “development revenue” is optimized. In 2023, the average gaming time of “Magic Domain” IP users increased 50.4% year on year, and the overall new user payment rate reached 11.6%, an increase of about 1.5 times over the previous year.

NetDragon's education business is Mynd.AI. The core operating carrier is Prometheus for overseas education. In 2023, the prevention and control of the epidemic was basically over in countries around the world, and there were few government rescue plans and subsidies for schools. As a result, overall demand for hardware in schools slowed down, but Prometheus still achieved a growth trend compared to before the pandemic. In 2023, the company's share of the global K-12 interactive flat panel display market (excluding China) reached 17.4%, stabilizing its leading position.

By regional market, Prometheus is at the top of the market share in many countries. For example, in 2023, the market share in the UK and Ireland was 22.3%, the market share in Germany was 22.9%, and the market share in the US was 26.9%, all maintaining the leading position in market share. The company has core hardware products ActivPanel 9 (high-end large screen) and ActivPanel LX (medium and low end large screen), the software product SaaS solution (Explain Everything), and the combination of “hardware+software” to continuously enhance the competitiveness of core products, while further expanding the market-based channels of more than 4,000 distributors/retailers around the world to increase the penetration rate of products in countries around the world.

AI has penetrated into all fields of the industry. NetDragon is seizing opportunities to continuously improve games and educational products through AIGC. For example, in the field of games, AI companions and non-player characters (NPCs) were developed in MOBA games to increase players' retention rate and promote monetization; in the field of education, the AI education platform EDA launched in 2023, Hughes plans to integrate AI technology into educational products such as Promi Interactive Tablet, 101 Education ppt, Central Library virtual experiments, and future experiments.

AI products for both major businesses are still in the exploration stage, and commercialization will take time. In addition, the company has greatly optimized operational efficiency through AI. For example, the AI usage rate in art production increased from 14% to 58%, and the increase in labor costs using AI was as high as 300%. AI is disrupting the company's product system and operation system. AI+ education, AI+ games, and AI+ operations will enable continuous growth in business scale and profit optimization.

It has long-term value, and underestimation is worth paying attention to

NetDragon's core highlight is that it allows shareholders to share the company's development results. Since its listing for 16 years, the company has uninterrupted dividends every six months, with a cumulative total of 36 dividends (including 4 special dividends), distributing a total of HK$16.68 per share, which exceeds the current share price and issue price (HK$13.18) per share. In fact, in Hong Kong stocks, every sector has high-quality stocks that pay dividends every year, but few have paid dividends continuously for more than 10 years. The company can be said to be one of the few companies with Hong Kong A-shares that have been paying dividends continuously for more than 15 years.

According to relevant trading software, the Hong Kong stock game software sector has 27 companies. According to Oriental Choice data, according to statistics from the Zhitong Finance App, in the game software sector, there are 8 companies with 0 cumulative dividends, 14 companies with 1-5 times, 3 companies with 6-10 times, 1 company with 11-15 times (IGG 13 times), and 1 company with 15 or more times (NetDragon has 32 times). Most of them are concentrated within 5 times. NetDragon is far ahead of its peers.

Furthermore, when stock prices retracted, the company stabilized market confidence and enhanced shareholder value through repurchases. In 2023, the company repurchased 9.844,500 shares at a total cost of HK$147 million, all of which were cancelled.

In terms of sustainable development, the company attaches importance to ESG construction. NetDragon's ESG performance continued to break through in 2023. It was selected as the “Sustainability Yearbook (China Edition)” first published by S&P Global (S&P Global) in June, and became the four selected Chinese Internet companies along with Tencent, NetEase, and Baidu; MSCI raised NetDragon's “ESG” rating to BBB, a significant increase from the previous rating, and was highly recognized by the market.

Notably, NetDragon has also been recognized by major investment banks. Among them, the BOC Securities Research Report believes that the company's Magic Domain IP has strong vitality, education tablets have launched SaaS monetization, and the application of AI technology in business is actively deploying AI technology. In 2023, the company made significant progress in developing an AI companion base in MOBA games and maintained a purchase rating; SPDB International Research also believes that the company's game business remains strong. Promethean recently launched a comprehensive SaaS solution, which will explore software revenue opportunities and maintain a “buy” rating with a target price of HK$15.

NetDragon has a high long-term investment value. On the one hand, investors receive dividend returns every year, and on the other hand, they enjoy market capitalization premiums. There was a slight correction last year due to the impact of the general environment, but the market value remained on an upward channel over the past 15 years. Currently, the company's PE (TTM) is 9.6 times and PB is less than 1 times, all far below 18.8 times and 3.3 times the game software sector, which is clearly underestimated.

Overall, NetDragon's performance is steady, the game business continues to grow, and the high gross margin brings abundant cash flow. The education business is expected to regain growth, mainly due to the gradual recovery in demand for overseas education hardware. At the same time, under the power of AI, AI+ games and AI+ education optimize products and operations, which is expected to accelerate performance growth. The company values shareholder returns, has long-term value, undervalued market capitalization, high dividend ratio, and high value ratio.