Core views:
A high-quality growth strategy promotes the steady growth of the company's performance. Reviewing the strategy of the past three years, the three investment directions were established in '21: overseas games, short videos, and corporate services. Develop new revenue streams while cutting costs and increasing efficiency for 22 years. In '23, budding businesses represented by video accounts and mini-games emerged. The cornerstone business share is steady, and diversified emerging businesses drive steady growth in mid-term performance. Long-term investment in generative AI and continuous exploration in the field of user scenarios and new technologies is quite imaginative.
Maintain the vitality of Evergreen Gaming combined with the development of new games. Through a long-term operation strategy, there is a lot of snow. The company's financial report for '23 revealed that the number of popular local games increased from 6 in '22 to 8 in '23, benefiting from the strong performance of the new product “Dungeons & Warriors: Origins” in '24, and may usher in a new major product cycle. Driven by strategy adjustments and the explosion of products such as “Wild Brawl”, the 24Q1 sales volume of overseas games also increased by 34%, and growth accelerated according to the 1st Quarterly Report.
Sprout's business is thriving, and marginal profit contributions are high. Commercialization is gradually increasing based on usage scenarios such as video accounts and applets; high-profit revenue streams such as advertisements, mini-games, and e-commerce technical service fees still have continuous growth drivers, speeding up the release of operating leverage.
Profit forecasting and investment advice. Considering the local game “Dungeons and Warriors: Origins” and the incremental contribution of the accelerated growth of overseas sales to the game in the second half of the year and next year, we raised our 24-25 game revenue forecast to 1898/204.6 billion yuan, with year-on-year growth rates of 5.6%/7.8%, respectively. We expect the company's 24-25 revenue to be 6589/726.1 billion yuan, an increase of 8.2%/10.2% over the same period. The adjusted net profit for 24-25 is estimated to be 2030/231.2 billion yuan, up 29% and 14% from the same period. Based on the SOTP valuation, we gave the company a reasonable value of HK$507.55 per share, maintaining a “buy” rating.
Risk warning. The risk of stricter regulations, stricter review of game versions, risk of being squeezed by competition brought about by new technology, and the risk of uncertainty caused by geographical factors in overseas business.