Incident: Perfect World released the 24H1 performance forecast on July 9. The company 24H1 expects to achieve a net loss of 0.16-0.2 billion yuan to the mother; deduct non-net loss of 0.198-0.238 billion yuan, turning profit into loss year over year. Among them, 24Q2 is expected to achieve a net loss of 0.13-0.17 billion yuan; non-net loss of 0.04-0.08 billion yuan was deducted, which is narrower than in 24Q1.

The refined management and control of the project were empowered by AI, and the deduction of non-net losses in 24Q2 narrowed month-on-month. The company expects to deduct non-net losses of 0.04-0.08 billion yuan in 24Q2, which is narrower month-on-month compared to 0.158 billion yuan in 24Q1.

We believe that the main reason is that (1) 24Q2's non-recurring profit and loss is estimated to be about 0.09 billion yuan, mainly due to one-time rental losses due to intensive consolidation of office space, non-recurring losses of invested companies, etc., while 24Q1 generated 0.129 billion yuan of non-recurring revenue due to matters such as the disposal of US Universal Pictures film assets; (2) through refined project control and AI technology, the effects of the company's cost reduction and efficiency are gradually showing, driving the corresponding reduction in personnel expenses, office space rent, etc.

The launch of new games has not contributed to profit and personnel optimization, and the company's game business is under pressure in the short term. The company's 23H1 game business is expected to achieve a net loss of 0.14-0.18 billion yuan to mother, and deduct a non-net loss of 0.13-0.17 billion yuan.

We believe that the pressure on the company's game business is mainly due to (1) a year-on-year decline in sales due to the impact of the product life cycle despite maintaining long-term operation of the game; (2) the company sorted out the talent pool and personnel optimization, which in turn affected current profits; (3) the company launched “One Punch Man: World” and “Persona: The Phantom of the Night” in the first half of the year. Among them, “One Punch Man: The World” fell short of market expectations; “Persona: The Phantom of the Night” did not meet market expectations; “Persona: The Phantom of the Night” did not meet market expectations; “Persona: The Phantom of the Night” surpassed market expectations; The game is still not generating profit in 24Q2. Looking backwards, the company is expected to gradually release profits by launching new games, and is expected to launch games such as “Divergent Million King Arthur: Ring”, “Code Name: Barbarian”, “Demon Continent 2” and “World of Immortals”. At the same time, it is actively promoting the optimization process of various projects such as “Immortal 2,” “Code YH,” and “Code Z”. It is recommended to pay attention to the company's subsequent new product development and launch performance.

Investment advice: In 2024-2026, we expect the company to achieve revenue of 7.03/7.645/8.25 billion yuan; net profit to mother 0.294/0.582/0.772 billion yuan; corresponding PE is 65.8/33.3/25.1 times, respectively. The company's performance is under pressure in the short term. It is recommended to focus on subsequent product optimization, launch progress, and post-beta performance to maintain a “buy” rating.

Risk warning: Product flow falls short of expectations; launch progress falls short of expectations; economic recovery falls short of expectations; industry policy changes.