The revenue for the second quarter of 2024 is expected to increase 12% year on year to 2.46 billion yuan. We expect Jinshan Software's revenue for the second quarter of 2024 to be 2.46 billion yuan, up 12% year on year; we expect to record operating profit of 0.75 billion yuan for the quarter, corresponding to an operating profit margin of 30.4%, which is basically the same as the previous year.

Key points of interest

Gaming business: Two-dimensional gaming continues to perform well, and flagship IPs highlight resilience. We expect game business revenue in the second quarter to record a 15% year-on-year increase under the high base for the same period last year, mainly due to the outstanding contribution of “White Forbidden Zone”. “Dust White Forbidden Zone” was released on multiple platforms around the world in July 2023. The performance has clearly picked up since the 1.7 version was launched in April this year, and it has had good sustainability up to now. On July 11, 2024, the one-year anniversary version of “Dust White Forbidden Zone” was launched, and it jumped 9th place in the iOS bestseller list on the day it went live. We believe that its good performance is due to the company's continuous optimization and adjustment of games based on user needs, which is conducive to the gradual establishment of the company's influence on the Second Circuit. We expect that the average monthly turnover in the second quarter may be at the level of 0.15-0.2 billion yuan; as versions continue to be iterated and subsequent marketing activities are carried out, we expect this performance to continue. Furthermore, “Sword Net 3 Unbounded” was officially launched on all platforms in June of this year. According to the latest data from the official website, the number of active users reached 11.46 million in the first month of the beta, including 6.91 million returning game users, accounting for 60%; about 79% of returning users were old users lost before 2017; in addition, according to company statistics, about 77% of users used the PC flagship terminal and Internet of Everything at the same time. We expect the overall performance of the “Sword Net 3” flagship mobile game and “Sword Net 3 Unbounded” to remain resilient in the coming quarters.

Office business: Short-term performance expectations are under pressure. We expect office revenue to increase 10% year-on-year in the second quarter, mainly disrupted by the pace of WPS AI implementation, B-side licensing requirements, and the short-term transformation of B-side subscriptions.

In terms of C-side business, the company released WPS AI grayscale pricing at the end of March. The company's short-term business promotion pace was delayed in May-June, which may affect the growth rate of individual subscriptions. In terms of B-side licensing business, we expect that the trend of localized orders may fluctuate and cause related revenue to decline significantly in the second quarter. In terms of B-side subscription business, the company will promote the transformation of venue licensing to a standard subscription model starting in 2024, which will have an impact on the current apparent revenue growth rate in the short term. As these short-term effects gradually dissipate, we expect the growth rate of office business revenue to gradually rise steadily in the second half of the year.

Profit forecasting and valuation

Considering the short-term performance of Jinshan Office, or due to the slow implementation pace of C-side WPS AI, fluctuations in B-side licensing demand, and B-side subscription business transformation, we lowered our 2024/2025 revenue by 3%/6% to 9.58 billion yuan/11.01 billion yuan; since the improving trend in operating margin was better than expected, the net profit forecast remained basically unchanged. Maintain the outperforming industry rating and target price of HK$30 (based on the 2024 SOTP valuation, corresponding to 36 times/26 times the 2024/25 price-earnings ratio). Currently, the company is trading at 27 times/20 times the 2024/25 price-earnings ratio, corresponding to 35% upward space.

risks

The performance of new games or the sustainability of core games fell short of expectations; the commercial implementation of WPS AI in the office business fell short of expectations, or the pace of promotion of localization fell short of expectations.