Incidents:
(1) On April 19, 2024, the company announced its 2023 annual report. In 2023, it achieved operating income of 5.96 billion yuan, YOY +24.1%, net profit to mother of 890 million yuan, YOY +63.8%, after deducting non-net profit of 830 million yuan and YOY +85.8%. Corresponding to 2023Q4 revenue of 1.91 billion yuan, YOY +21.7%, net profit to mother of 320 million yuan, YOY +104.6%, after deducting non-net profit of 290 million yuan, YOY +160.5%. The company announced a profit distribution plan: Based on 1,957 million shares, a cash dividend of 0.6 yuan will be distributed to all shareholders for every 10 shares, with a total dividend of 117 million yuan.
(2) On April 25, 2024, the company announced its 2024Q1 results, achieving revenue of 1.49 billion yuan, yoy +22.8%, net profit to mother of 300 million yuan, yoy +65.6%, net profit after deducting non-return to mother of 290 million yuan, yoy +95.4%.
Investment highlights:
Game turnover increased month-on-month in 2023, and net revenue margin reached a record high; AI revenue doubled year-on-year.
(1) Revenue side:
① By business: Gaming revenue was 4.5 billion yuan, YOY +26.5%, accounting for 75.4%; computer business totaled 1.46 billion yuan, YOY +17.1%, accounting for 24.6%. Among them, AI/ICT operation and management business was 1.23 billion yuan, YOY +20.1%, accounting for 20.6% of total revenue. AI subsidiary Dingfu Intelligence achieved revenue of 140 million yuan in 2023, YOY +114.5%.
② Looking at regions: In 2023, mainland China achieved revenue of 1.61 billion yuan, YOY +8%, accounting for 27.1%; overseas, Hong Kong, Macao and Taiwan achieved revenue of 4.35 billion yuan, YOY +31.3%, accounting for 72.9%.
③ On a quarterly basis, 2023Q1-Q4 achieved revenue of 12.1/14.4/14/19.01 billion yuan, YOY +22.3%/32.2%/21%/21.7%, mainly due to the month-on-month increase in game product turnover (QOQ +10%/5%/2%/8%) and the computer business Q4 as a revenue peak.
(2) Gross profit side: The gross profit margin in 2023 was 62.7%, +2.3 pct. Among them, the gross profit margin of the game business was 71.1%, +3.6 pct year over year, mainly due to improving operational efficiency and saving costs. We think this may be partly due to the increase in the share of government services.
(3) Cost side:
① In 2023, sales expenses were 1.47 billion yuan, YOY +17.1%, and sales expenses were 24.7%, year-on-year. The main sales expenses were game promotion expenses. The total amount of game promotion in 2023 was 1.36 billion yuan. The share of revenue fell from 35% in 2021 to 30% in 2022, further falling to 29% in 2023, or related to the revision of “City of the Rising Sun” in line with industry side gameplay trends. The game's promotion fee for the first half of the year was 66/70 million yuan respectively. The increase in promotion spending in the second half of the year came from “City of the Rising Sun” taking the initiative to increase its launch efforts in the second half of the year, driving its Q4 turnover to increase month-on-month (QOQ +11%). Q4 sales expenses were 360 million yuan, a decrease compared to Q3's 410 million yuan.
② In 2023, the management fee was 920 million yuan, YOY +17.9%, and the management fee ratio was 15.4%, the year-on-year -0.81 pct, of which the share payment fee was 110 million yuan, mainly including the 2021 employee shareholding plan of 0.2 billion yuan, the Dingfu Smart Equity Incentive Plan of 50 million yuan, the 2023 employee shareholding plan of 0.2 billion yuan, and the 2023 restricted stock plan. Among them, Dingfu Smart Equity Incentives end in 2025, and profits are expected to be released in 2026.
③ In 2023, R&D expenses were 330 million yuan, YOY +8.6%, R&D expenses rate 5.5%, and the number of R&D personnel increased by 2.7% to 1,156, with an overall steady and slight increase.
④ Asset depreciation of $90.8 million in 2023 includes development expenses ($40 million; “Everland” is no longer online after comprehensive assessment), intangible assets ($0.3 billion), goodwill ($100 million, IoT Asset Group), and impairment losses in inventory and contract performance costs.
(4) Net profit side: Net profit margin of 14.9% to mother in 2023, +3.6 pct year on year, after deducting 13.9% of non-net interest rate, and +4.65pct year over year, due to increased game gross margin, improved marketing efficiency, and reduced computer losses (estimated based on company profit - game profit). In 2023, Shell Gaming's net profit was 1.1 billion yuan, yoy +44.5%, net interest rate 24.6%, +3pct year-on-year. Dingfu Smart's net loss was 62.926 million yuan. The loss margin narrowed year-on-year. After deducting the subsidiary's equity incentive fee (49.617 million yuan), it achieved a net profit of 13.59 million yuan.
(5) Reduced 2024Q1 launch, improved efficiency, and unleashed performance
2024Q1 revenue was 1.49 billion yuan, yoy +22.8%, gross profit margin of 63.7%, year-on-year -0.3 pct, sales/management/ R&D expenses were 19.4%/17.2%/6.2% year-on-year, respectively, and -7.9/+5/-1.9 pct, of which sales expenses were 290 million yuan, yoy -12.9%, and QoQ -19.3%, mainly due to reduced sales of main products, management expenses of 260 million yuan, yoy +72.9%, mainly due to increased employee remuneration.
2024Q1 net profit to mother is 300 million yuan, yoy +65.6%, net interest rate to mother 19.8%, yoy+5.1 pct, net profit after deducting non-return to mother 290 million yuan, yoy +95.4%. The sharp increase in profit is mainly due to a reduction in investment costs and the release of profits.
Turnover also increased by 19.1% in 2023. “Rising Sun” contributed to the main increase in revenue profit. “Fire of War” steadily released profits during the maturity period, and core product operating data improved. According to Sensor Tower, 2024Q1 “Rising Sun” continued to grow year on year; reserve products are expected to be commercialized during the year, focusing on the launch and launch of 2025H1.
(1) “The City of the Rising Sun”: The annual turnover of Dangdang has increased rapidly, and all operating data are healthy. In 2023, turnover was 3.3 billion yuan, YOY +30%, active user YOY +21% vs ARPU YOY +8%; paid user YOY +6% vs. ARPPU YOY +23%. According to Sensor Tower, 2024Q1 “City of the Rising Sun” sales increased 10% year over year.
(2) “War and Order”: Steady flow and release profits. Turnover of 1.15 billion yuan in 2023, YOY +5%, recovered after turnover pressure in 2022 (YOY -9%). Looking at the breakdown, active users YOY +2% vs. ARPU YOY +3%; paid users YOY -16% vs ARPPU YOY +24%, indicating that the annual growth was mainly driven by increased payment depth, and user return also contributed.
(3) “Endless Sky”: Shrink the launch and focus on core products. In 2023, the turnover was 180 million, YOY -22%, mainly due to the almost cessation of launch in the second half of the year.
(4) Reserve products: “Code DL” and “Code LOA” are expected to be commercialized within the year. It is recommended to pay attention to the launch and launch of 2025H1 (in the company's history, it is usually decided whether to increase sales 3-6 months after the product is officially commercialized).
Profit forecasting and investment rating: The company takes “innovation-driven, global layout” as a strategy, and continues to create industry products in the two major business segments of gaming and software and information technology services. The C-side layout empowers the industry. The company's Shell Game is the first tier of Chinese games to go overseas and is expected to rank among the top. Attention to the bottom of technology helps the company continue to grasp new technology trends such as AI, empower the industry, and create new growth points. Considering the excellent performance of the 2024 core product “City of the Rising Sun”, the 2024-2026 net profit was adjusted to 10.6/12.9/1.44 billion yuan, corresponding PE to 18/15/13x, maintaining the “buy” rating.
Risk warning: Increased competition in the industry, progress and performance of new product launches falling short of expectations, declining flow of old products, operational accidents, changes in overseas policies, risks related to management, downward valuation center, falling short of expectations, etc.