Incident: 2024Q1, the company achieved revenue of 1,329 billion yuan, net profit to mother of -0.0.19%, net profit to mother of -30 million yuan, or -112.33% year-on-year, net profit after deducting non-attributable net profit of $158 million, or -177.51% year-on-year.

Performance is under pressure due to the product cycle, so keep an eye on the pace of new product launches in the future. 2024Q1's game business achieved revenue of 1,285 billion yuan, -23.80% YoY, -4.90% month-on-month, and net profit of 115 million yuan. Mainly affected by the product life cycle, the flow of some games naturally declined, while the contribution of new products was limited. Looking ahead to 2024, in terms of new products, “One Punch Man: World” has been publicly tested in many overseas countries and regions in February 2024, and is expected to be launched domestically. The live action interactive movie game “Beauty, Please Don't Influence My Studies” will be launched on Steam on March 29, and the two-dimensional RPG “Persona: The Phantom of the Night” will be officially launched on April 12, as well as in Hong Kong, Macao, Taiwan, and South Korea. In terms of product reserves, “Divergence One Million King Arthur: Ring” has recently completed paid tests in Hong Kong, Macao and Taiwan and has received the edition number. “Immortal 2,” “Light Ink Shui Yunxiang,” “Code Name Barbarian,” “World of Immortals,” and “Perfect New World (Perfect New World)” will also begin a new round of testing one after another. In addition, various products such as “Code Name New World”, “Code Name YH”, “Code Z”, “Spirit Cage”, and lightweight mini games are also being actively developed. The film and television business achieved revenue of 347.196 million yuan, -82.19% year-on-year, and -85.21% month-on-month. The main reason was that there were few film and television productions broadcast and confirmed revenue in Q1, and net profit of 117 million yuan to mother, mainly due to the disposal of the US Universal Pictures film single assets.

The gross margin has increased steadily, and the cost ratio has increased due to personnel optimization. 2024Q1's gross margin was 66.94%, +1.77pcts year-on-year and +8.20pcts month-on-month, further improving operational efficiency. The management fee rate was 19.47%, +9.65 pcts year on year, and +8.12 pcts month on month, mainly due to personnel optimization; the sales expense ratio was 17.32%, +4.65 pcts year over year, and +4.05 pcts month over month. It is expected that Q1 One Punch Man will go live overseas and P5X will incur some promotion costs.

AI: It has been applied to many core aspects of R&D. The company has applied AI technology to the R&D pipeline, including art, procedures, planning, operation, security, testing, etc., 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), story generation, and big world generation to help R&D teams build AI-driven game production pipelines.

Investment advice: We expect the company to achieve revenue of 86.30/95.29/10.335 billion yuan in 2024-2026, +10.77%/+10.42%/+8.45%, net profit to mother of 10.34/12.30/1.386 billion yuan, +110.31%/+18.95%/+12.71% year-on-year, corresponding PE of 18.60X/15.64X/13.87X, maintaining a “buy” rating.

Risk warning: New product launches fall short of expectations, industry competition intensifies, policy risks