Mainly dragged down by the weak performance of old games, 2H23's revenue decreased 11% year over year, and adjusted net loss was RMB 147 million.
Based on the increased contribution of “Let's Go Muffin” and the increase in TapTap advertising revenue, we expect revenue to increase 28% year over year in 2024 and adjusted net profit of RMB 406 million.
Maintaining the “buy” rating, the target price was lowered to HK$17.00 (corresponding to 12 times the 2025 P/E, which can be obtained at a reciprocal discount).
The English version of this Hong Kong Stock Connect report was released by Huaxing Securities (Hong Kong) at 6 a.m. on April 5, 2024. The Chinese version was reviewed by Zhao Bing (Securities Analyst Registration Number: S1680519040001) of Huaxing Securities. If you would like to further discuss the views expressed in this report, please contact your sales representative at Huaxing Securities.
2H23 performance review: Xindong announced 2H23 results. Current revenue decreased 11% year-on-year to RMB 1.64 billion, and adjusted net loss was RMB 147 million. The 29% year-over-year decline in revenue from exciting games was due to the weakening performance of older games (such as “Sausage Party”), which was partially offset by contributions from three new games (including “Torchlight: Infinite”). Thanks to increased demand for new travel marketing and improvements in the company's marketing system, information service revenue increased 36% year over year.
In terms of monthly active users, as the company increased marketing expenses, some domestic 2H23 recovered 11% month-on-month, but still decreased by 9% year-on-year. The company said TapTap's average monthly active user growth rate in 4Q23 turned positive year over year. The number of monthly active international users decreased by 52% year-on-year due to a reduction in marketing investment. In terms of profit margins, the exciting gross profit margin increased to 63.0% due to changes in the revenue structure. Thanks to personnel optimization and prudent marketing expenses, the company's operating expenses were reduced by 10% year-on-year. However, due to operating deleveraging due to reduced revenue, the adjusted net loss still reached RMB 147 million, and the corresponding profit margin was -9.0% (-7.6% compared to 2H22).
The release of “Let's Go Muffin” in mainland China will be a catalyst in the near future. “Let's Go Muffin” is a placement game developed by Heart. It was released in Hong Kong, Macau, and Taiwan on January 23, 2024. The average ranking of the three regions from January 23 to April 2 was 2nd, 3rd, and 2nd, respectively. According to the iOS Apple Store, “Let's Go Muffin” is expected to be released in mainland China on May 15. We believe that, given the strong performance of this game in the above three markets and considering that the mainland distribution team is more experienced, it is also expected to achieve excellent results in the mainland release. We expect “Let's Go Muffin” will contribute 1 billion yuan in revenue in 2024. Additionally, management said during the performance call that “Heartbreak Town” and “Ether Restart Day” will be tested in April and are scheduled to be released this year. At the same time, the company will continue to invest in Sausage Party.
We expect gaming revenue to grow 33% year over year in 2024.
Net profit is expected to return to positive values in 2024. Based on the incremental contribution of “Let's Go Muffin” and TapTap's higher monetization, we expect total revenue to grow 28% year over year. We anticipate that marketing expenses will increase year over year as new games and TapTap marketing efforts increase, but we expect R&D and management expenses to decrease due to a reduction in the number of employees and strict cost controls. We forecast an adjusted net interest rate of 9.3% for 2024.
Maintaining the “Buy” rating, the target price was lowered to HK$17.00 (previously HK$21.00). Taking into account the incremental contribution of “Let's Go Muffin,” we raised our 2024/25 revenue forecast by 3%/2%, while reducing the adjusted net profit margin for 2024 by 2.2 percentage points due to the game's high pre-marketing expenses. We keep our 2025 adjusted net profit margin forecast largely unchanged. Our target price is based on 12 times the 2025 P/E (5 times the previous value), which is still in line with the average forward P/E (2024) of peers in the industry. We're going back and forth at a 10% discount rate. Risk warning: Acceptance of new games falls short of expectations; regulations are being tightened.