Core views:
The new product performed well, driving the company's performance improvement. The company's newly launched self-developed product “Let's Go Muffin” performed well. According to the company's official website, the product was launched in the Hong Kong, Macao and Taiwan markets in January '24 and the mainland China market in May '24. According to Qimai, “Let's Go Muffin” entered the top 10 domestic bestsellers in the first week after launch. As of May 28, the product reached the fourth best seller list, after “Dungeons and Warriors: Origins”, “Wang Zhe Rongyao” and “Peace Elite”.
Self-developed games drive TapTap to become active, and increased competition in purchasing volume boosts advertising revenue. The game login interface shows that the “Let's Go Muffin” login requires a TapTap account, so product-side growth is expected to drive the growth of platform users. The purchase budget is expected to increase after the launch of the company's products, boosting the activity of the platform. At the same time, we expect summer product launches to be intense, industry competition is fierce, and purchase prices are expected to increase, thereby boosting the platform's advertising revenue.
The results of reducing costs and increasing efficiency have been shown, and expenses have been gradually reduced. The company promotes cost reduction and efficiency, reduces investment in game research and development, and focuses on core products. On the one hand, they are more cautious in investing sales expenses; on the other hand, they mainly focus on personnel expenses. According to the company's financial report, the number of employees dropped from a maximum of 2,327 in '21 to 1,452 in '23. Remuneration and welfare expenses were reduced from $1,417 billion in '21 to $1,178 billion in '23. Remuneration expenses are expected to continue to decrease in 24 years, leading to improved performance.
Profit forecasting and investment advice. The company's new game launch performance is excellent, and the active users and commercialization capabilities of the TapTap platform are expected to improve. We estimate that the company's revenue for 2024 to 2026 will be $52.63 billion, 62.46 billion yuan, and 6.674 billion yuan, respectively, and net profit due to mother will be 558 million yuan, 7.64 million yuan, and 835 million yuan from 2024 to 2026, respectively. Using the segmented valuation method, the company's game business is estimated to be reasonably valued at RMB 7.209 billion; the community business is reasonably valued at RMB 5.855 billion. The company has a reasonable valuation of HK$14.36 billion and a reasonable value of HK$29.88 per share. Maintain a “buy” rating.
Risk warning. There is a risk that the competitive landscape will deteriorate, the risk that regulations will become stricter, the risk that self-developed games will fall short of expectations, and the monetization of TapTap users is uncertain.