Core views

On May 7, China's Ruyi announced the acquisition of 100% of Byte's assets, Beijing Youai Mutual Entertainment Technology Co., Ltd., with a transaction consideration of 259 million yuan. Currently, the core asset of Ai Mutual Entertainment is “Red Alert OL”. After the equity transfer is completed, it is expected to further expand the company's game layout, optimize resource allocation, and promote overall performance growth, based on the “Red Alert” IP's broad player base. As a comprehensive game company with integrated R&D and operation, Jingxiu Games, a subsidiary of Ruyi, is committed to the development and production of quality content, and will focus on developing leading IP cooperation projects in the future. The company's online game service business revenue in '23 was RMB 446 million, an increase of 703% over the previous year. In the short term, games will contribute to new business growth. In the long run, the company is expected to further extend the IP life cycle, explore copyright value, and enhance the company's ability to monetize its film and television intellectual property rights through film and game linkages.

Brief review

The company acquired Beijing Youai Entertainment to expand its online gaming service business. Youai Mutual Entertainment is a game company focusing on two-dimensional RPGs (role-playing games) and strategy categories. It was acquired by Byte in 2021. According to Sensor Tower, Youai Mutual Entertainment ranked 29th in the 2023 overseas revenue ranking of Chinese game manufacturers. The company previously launched the famous game “Place the Girl” in the Japanese market. By the end of 2023, Youai Mutual Entertainment's net assets were about 344 million yuan, and the company's net profit in 2021/2022 was 4.43 million/2.89 million yuan respectively. Currently, the company's core assets are R&D assets for the “Red Alert OL” game. As of March 2020, the number of registered users of “Red Alert OL” exceeded 20 million yuan, and the maximum monthly turnover reached 200 million yuan. The IP for this project originated from the US electronic arts console game “Red Alert”. We believe that after the equity transfer is completed, relying on the broad player base of “Red Alert” IP, it is expected that the company's game layout will be further expanded, resource allocation will be optimized, and overall performance growth will be promoted.

The company's Jingxiu Games is backed by Tencent and has plenty of new game reserves. Future movie and game linkages are expected to build a new growth curve. Jingxiu Gaming is dedicated to the development and production of quality game content. It has rich IP. The 24-year new game “Ragnarok: Love Is Like First Sight” was launched at the end of March, and the official civilized IP mobile game “World Qiyuan” (developed by Tencent Northern Lights Studio), which was distributed as an agent, has opened full-platform reservations. Both “Battlefield” and “Wilderness Country” products have obtained versions, and it is expected that they will also be launched within 24 years. Through further deepening cooperation with Tencent, diversified cooperation in the fields of game agency distribution, joint operation, and marketing services is expected to establish a second growth curve.

We expect the company's overall revenue for 2024-2025 to be 50.8/6.81 billion yuan, corresponding to a year-on-year growth rate of 40%/34%; adjusted net profit of 12.4/1.63 billion yuan, corresponding to a year-on-year growth rate of 28%/32%. Awarded 20x PE in 2024 with a target market capitalization of $24.8 billion/ HK$2.32, maintaining a “buy” rating.