Core views
The company's 23-year performance is under pressure, mainly due to the decline in product cycles and old games.
Looking forward to this year's rich product reserves, this is a phased release of the company's R&D investment. Among them, the launch of “P5X” reached the 8th place in the iOS game bestseller list. We are looking forward to subsequent performance in Hong Kong, Macao, Taiwan, and South Korea. The other two Japanese IP games “One Punch Man:
“World” and “Diversive Million King Arthur: Ring” are also expected to launch within the year. Other games are expected to launch “Immortals 2” and “Light Ink Cloud Country”. In addition, the company's game business is actively adjusting its organizational structure to improve operational efficiency; the penetration rate of AI in the core business has increased markedly, and it is actively cooperating with Microsoft and Nvidia.
The company's dividend plan for fiscal year 23 exceeded expectations and plans to distribute a cash dividend of 883 million yuan. Based on the latest closing price, the dividend rate is 4.6%. We expect the company's 24-26 revenue to be 8.943 billion, 10.968 billion, and 10.968 billion, up 14.79%, 12.91%, and 8.62% year-on-year, and is expected to achieve net profit of 969 million, 1.123 billion, and 1,431 million yuan, up 97.08%, 27.30%, and 16.05% year-on-year. The latest market value corresponding valuations are 19.6x, 15.4x, and 13.2x, respectively, maintaining a “buy” rating.
occurrences
The company released its annual report for 2023, achieving operating income of 7.791 billion yuan (YoY +1.57%) in 23, achieving net profit attributable to shareholders of listed companies of 491 million (YoY -64.31%), and net profit deducted from mother of 210 million (YoY -69.56%). Among them, in the fourth quarter, the company achieved operating income of 1,595 million (YoY -18.57%, QoQ -8.09%), realized net profit attributable to shareholders of listed companies of $123 million (YoY -90.27%), and realized net profit withheld from non-mother of $247 million (YoY -7.46%).
Brief review
1. 23 business review: The game business was under pressure, and film and television losses narrowed. The company achieved revenue of 7.791 billion yuan in 23, an increase of 1.57% over the previous year. Of these, it achieved revenue of 1,595 billion yuan in the fourth quarter, a year-on-year decrease of 18.57%.
Net profit to mother in '23 was 491 million yuan, down 64.31% year on year. Among them, net profit lost 123 million yuan in the fourth quarter, down 90.27% year on year. Mainly affected by the decline in the gaming business.
Game business: The company's game business achieved revenue of 6.669 billion yuan, a year-on-year decrease of 7.91%, and realized net profit of 490 million yuan, a year-on-year decrease of 69.21%, and realized net profit deducted from non-return to mother of 456 million yuan, a year-on-year decrease of 57.74%. On the one hand, due to the influence of the game product development cycle, the company launched few new games in '23. The only key game was the agent product “Dragon Eight Part 2: Dragon Warriors”; on the other hand, although the old game operated for a long time through content updates and refined marketing, the flow rate declined due to the life cycle.
Film and television business: The company's film and television business achieved operating income of 1,034 billion yuan, a year-on-year increase of 222.46%, and achieved net profit of about 93 million yuan, an increase of about 39% over the previous year, and realized net profit deducted from non-return to mother of about 82 million yuan, which is narrower than losses in the same period last year. These losses are mainly due to credit impairment losses due to accounts receivable. Mainly, the company adheres to the boutique content route and focuses on the strategy of “improving quality and reducing weight”. Premium TV series such as “Starfall Condensed into Sugar”, “The Legend of Yunxiang”, “Warm and Sweet”, “Heart Care”, “Days of Chasing the Light”, “Secret Agent Mission”, and “Welcome to Mile Village” have been broadcast one after another, and have both market popularity and reputation. In addition, the company began setting up a skit business in 2022, and has already seen initial results. “Full-time Househusband Training Program” and “Let's Wake Up! “Love in Love” and “Happy New Year” have all been on the top 1 of the most popular Douyin skit dramas since they went live, and “The Little Lady in the Family” and “The Moon Shines in Fire” reached the top 1 on the Youku skit popularity list.
2. Profit margin analysis: The gross margin decreased year-on-year, the expense ratio remained stable during the period. The gross margin declined, and the overall expense ratio remained stable during the period. In terms of gross margin, it was 59.70% in '23, -8.74pct. In terms of the cost rate for the period, it was 52.59% in 23 years, -1.71 pct year on year. Among them, the sales/management/finance/R&D expense ratios were 15.34%/9.05%/0.02%/28.17%, respectively, with a year-on-year change of +0.89pct/-0.52pct/-0.40pct/-1.68pct. The increase in marketing expenses mainly led to an increase in sales expenses, and a decrease in employee remuneration, outsourcing and contract development costs led to a reduction in R&D expenses.
3. Continuous optimization of the organizational structure and acceleration of AI application
The game business adjusted its organizational structure, and the number of R&D personnel declined. The company adjusted the organizational structure of the game business in 2023, split the original project center into an independent studio and reported directly to the head of the game business. The management model was flatter and the game business operated more efficiently. The number of R&D personnel in the company at the end of 2023 was 3,933, a decrease of 290 compared with 2022, and a year-on-year decrease of 5.45%.
AI is used at the core of R&D, and cooperation has been reached with Microsoft, Nvidia, etc. The company's AI center has applied AI technology to various core aspects such as art, procedures, planning, operation, safety, and testing, covering various aspects such as intelligent NPCs, intelligent game assistants, scene modeling, AI painting, AI plot, AI dubbing, etc. At the same time, it has developed AI development tools such as D+ (Dialogue+ tool), plot generation, and big world generation for the needs of different types of game projects. In February 2024, the perfect world intelligent character dialogue algorithm developed by the company was completed. As a major model for the game business, the algorithm is trained with the company's own game data to provide users with efficient intelligent dialogue feedback services, and is mainly used in scenarios such as intelligent game customer service and intelligent character dialogue. In addition, the company has joined Microsoft Labs, participated in the Azure Open AI acceleration program, and collaborated with Nvidia to officially integrate its “World of Immortals” into Nvidia Audio2Face technology.
4. 24-year outlook: Core product reserves are abundant, and the new product cycle begins with abundant product reserves in 2024, which is the centralized release of the company's R&D accumulation in the past two years. “Persona: The Phantom of the Night” was launched domestically on April 12. The game is the first mobile game in the “Persona 5” IP series. It reached the top of the iOS game free download list and reached the top 8 in the iOS game bestseller list. It has remained in the top 20 iOS game bestsellers, and was launched in Hong Kong, Macao, Taiwan, and South Korea on 4.18. In addition, the company is expected to launch two new Japanese IP games such as “One Punch Man: World”, “Diversive Million King Arthur: Ring”, and “Immortal 2” and “Light Ink Cloud Township”.
The first interactive movie game's word-of-mouth exceeded expectations, reflecting the company's advantages in film+game development. The company's first interactive video game, “Beauty, Please Don't Influence My Studies”, was officially launched on Steam at the end of March. Player reviews/word of mouth exceeded expectations. Currently, out of 3,700 reviews, 97% are positive reviews. The game is priced at 6.99 US dollars, making it one of the top 10 best-selling games in the country. The game is the company's first attempt at a live action movie game. The entire content lasts 350 minutes, combining the advantages of film and television production and game development.
Investment suggestions: Affected by the R&D cycle and the decline in old games, the company's 23-year performance is under pressure, and its 24-year product reserves are abundant. The P5X has been released as the highest in the iOS game bestseller list in the past two years. It was launched in Hong Kong, Macao, Taiwan, and South Korea on April 18. The company is expected to launch this year, as well as two new Japanese IP games “One Punch Man: World”, “Divergence One Million King Arthur: Ring”, and “Demon Shui Yun Xiang”. In addition, the company's game business adjusted its organizational structure to improve operational efficiency; AI applications and core R&D links; and cooperated with major companies such as Microsoft and Nvidia. We expect the company's 24-26 revenue to be 8.943 billion, 10.968 billion, and 10.968 billion, up 14.79%, 12.91%, and 8.62% year-on-year, and is expected to achieve net profit of 969 million, 1.123 billion, and 1,431 million yuan, up 97.08%, 27.30%, and 16.05% year-on-year. The latest market value corresponding valuations are 19.6x, 15.4x, and 13.2x, respectively, to maintain a “buy” rating risk analysis
Risk of declining industry sentiment; risk of declining game flow; risk of loss of total game users; risk of operating errors in key projects; risk of delays in the launch of new games; risk of falling short of expected performance after launch; risk of reduced marketing ROI; risk of rising marketing purchase costs; risk of acquisition of unlicensed game versions falling short of expectations; risk of game industry content regulation risk; intense industry competition; risk of rising labor costs; risk of loss of core talent; risk of exchange rate fluctuations affecting net profit; risk of changes in investment income affecting net profit; risk of shifting player preferences; macroeconomics The risk of continued pressure; the risk of overseas game distribution; the risk of AI applications falling short of expectations; the development of applet games falling short of expectations; and the risk of overseas game distribution.