The forecast is that 1H24 has a net loss of 1.60 to 0.2 billion yuan, which is lower than our and market expectations. 1H24 has a net loss of 1.60 to 0.2 billion yuan (1H23 profit of 0.38 billion yuan), after deducting non-net loss of 1.98 to 0.238 billion yuan (1H23 profit of 0.286 billion yuan). Among them:

The net loss for 2Q24 was 1.30 to 0.17 billion yuan, which is slightly lower than our expected loss of 70 million yuan. We believe that the main reason is that non-recurring loss projects in the second quarter were higher than expected (one-time rental cancellation losses due to intensive consolidation of office space, non-recurring losses of invested companies, etc.); after deducting non-net losses of 4,000 to 80 million yuan, the overall forecast range was lower than market expectations.

Key points of interest

Stock game sales declined naturally due to the life cycle, and it is expected that the launch of new games within the quarter did not contribute to profits. The 2Q24 game stock was relatively stable month-on-month, and the popularity of some products picked up (such as the annual launch of “Tower of Magic” in late April and the anniversary of “Dream New Immortals” at the end of June), but there was still a natural decline compared to 2Q23, affecting single product profits. The user coverage of the new game “Persona” in the second quarter was slightly smaller than previously anticipated, and the level of audience segmentation was slightly higher, which affected product sales. We estimate the game's first-month revenue of 100,000,000 yuan. Considering the effects of delayed sales and early promotion, it may not have contributed to profits during the quarter. The film and television business lost about 37 million yuan in 2Q24. We think it is also related to the weak profits of custom dramas, skits, etc.

Personnel optimization costs affect operating profits, and intensive integration of office space causes non-recurring losses. In terms of team adjustments, the company carried out major project sorting and personnel adjustments in 1H24. We expect the relevant optimization costs to be in the amount of tens of millions of yuan in a single quarter. Among them, considering that the company's 2Q24 deducted non-net losses have narrowed month-on-month, we expect optimization costs to drop slightly month-on-month during the quarter. Segmented into the game sector, according to the company's announcement, the game business 1H24 is expected to lose 1.40 to 0.18 billion yuan (1Q24 loss 0.115 billion yuan), and the 2Q24 loss margin has also narrowed. In terms of non-current items, the company stated that the non-recurrent loss of 90 million yuan in the second quarter was mainly due to the impact of intensive consolidation of office space, such as one-time rental cancellation losses and losses for invested companies; after adding back, it was basically the same as our previous expected loss of 70 million yuan.

Follow the team to sort out the progress and the product process under development. 3Q24 is following the “One Million King Arthur” Hong Kong and Macau platform launch plan, the “Immortal 2” paid test (August 8), the “Code Name Barbarian” overseas unabridged test plan, and the launch process within the year. Follow up on “World of Immortals”, “Code Name YH (Different Ring)” (some materials have already been revealed on the official platform account), “Code Z”, etc. We believe that sorting out the company's talent pool is beneficial in the medium to long term to focus on core products, and it is recommended to continue to pay attention to the progress of internal adjustments and product developments under development.

Profit forecasting and valuation

Maintain an outperforming industry rating. As personnel adjustments were higher than expected, related expenses, one-time rental losses, etc. affected profits; at the same time, the progress of game product launch was slightly lower than expected, reducing net profit to mother by 67%/43% to 0.281/0.584 billion yuan in 24/25. Considering that key product launch points may be from the end of this year to next year, switch to a 25-year valuation (P/E 25x), and the target price will be reduced by 32% to 7.5 yuan, with 5% upside.

risks

The external environment affects users' entertainment consumption expenses, industry competition intensifies, industry policy changes, and personnel optimization and adjustment have led to cost increases.