Expand AI and big data with games going overseas as the core. Shenzhou Taiyue was founded in 2001 and is positioned in the field of system network management. In 2006, the company established an international business department and began exploring internationalization. In 2009, the company was listed as one of the first 28 companies on the Shenzhen Stock Exchange GEM. In 2013, Shenzhou Taiyue acquired Tianjin Shell Software Co., Ltd. and began entering the field of game development and operation. In 2016, the Shenzhou Taiyue Artificial Intelligence Research Institute was formally established. The company began to vigorously deploy artificial intelligence and wholly acquired Dingfu Technology in the same year to focus on expanding the big data business. In 2018, the company's hit game “The City of the Rising Sun” was launched. In 2022, the company's game business was on the list of the top 30 Chinese game makers with overseas revenue of the year.

Shell games generate stable revenue and are leading the computer business industry. Shenzhou Taiyue has been deeply involved in the digital economy for more than 20 years, forming a digital industry layout that “follows the ICT architecture layout, the cloud provides infrastructure, the C-side lays out games, and the B-side empowers the industry”, forming two major business clusters: mobile game business, software and information technology service business. The company's game business revenue in 2023 was 4.497 billion yuan, accounting for 75.43% of the company's total revenue. Furthermore, the company maintains industry leadership in cutting-edge technology fields such as artificial intelligence, 5G private network communication, and self-intelligent networks.

Game business: Deeply involved in the SLG category and skilled in long-term operation. Shell Games focuses on the SLG circuit. The company has successfully released a number of products in mainstream game markets around the world. The most representative products are “Age of Forigins” and “War and Order”. “War and Order” has been online for eight years, and the turnover has stabilized at around 1.1 billion in recent years. “Age of Origins” has been online for five years, and the circulation has maintained a growing trend until now, reaching 3.29 billion in 2023. The company will release and launch two new games overseas in 2024, both in the SLG+ business simulation category. We believe that the company's old product flow is steady. With the launch of two new games this year, the game business's revenue and profit are expected to maintain a high growth trend.

Computer business: Focusing on the three major sectors, it is expected to become a performance growth point. After optimization and restructuring, the company's computer business mainly focused on three major sectors: artificial intelligence and big data, ICT operation management, Internet of Things and communications. The company's computer business revenue has been growing steadily for the past three years, reaching a new high of 1.465 billion yuan in 2023, an increase of 17.08% over the previous year. We believe that the company's cloud business and communication services are well laid out overseas, and with the development of new technologies such as artificial intelligence, the future profitability of the computer business is expected to fully improve.

Profit forecasting and valuation analysis. We expect the company's 2024-2026 revenue to be 71.18 billion yuan, 86.89 billion yuan, and 10.067 billion yuan, respectively, net profit to mother of 10.80 billion yuan, 13.47 billion yuan, and 1,553 million yuan, and EPS 0.55, 0.69, and 0.79, respectively. Referring to comparable companies, we gave the company 20-23 times dynamic PE in 2024, with a corresponding reasonable value range of 11.00-12.65 yuan/share. For the first time, coverage gave the company an “superior to market” rating.

Risk warning. 1) Competition for games overseas intensified; 2) The launch of new products was delayed, and the post-launch flow fell short of expectations; 3) New technology innovation fell short of expectations; 4) Changes in overseas game-related policies.