We forecast 2Q24 revenue growth 6% year over year to 25.3 billion yuan
We expect the company's 2Q24 revenue to change +6%/-6% to 25.3 billion yuan (Bloomberg agreed to expect 26.1 billion yuan), and non-GAAP net profit fell 16%/11% YoY to 7.6 billion yuan (Bloomberg agreed to expect 7.93 billion yuan; 2Q23 had a high base of 1.47 billion yuan in exchange earnings).
Key points of interest
The seasonal impact declined slightly from month to month, the basic market was relatively stable, and the “Dream West Journey” PC fluctuated in the short term during the quarter. We judge: 1) Mobile games: Due to seasonal effects (Q1 has winter vacation+Spring Festival holidays, etc.), revenue declined slightly from 2Q24. The year-on-year increase was still positive due to a net increase in “Against the Water” mobile game and a steady, moderate increase in sales of some products. 2) PC gaming: This may be a year-on-month decline, mainly due to seasonal effects and the current “Journey to the West” PC adjustments had a slight impact on sales.
Sales expenses are expected to have declined slightly month-on-month, and operating profit margins have risen steadily and slightly. Considering that there were almost no major new games launched in 2Q24, we expect sales expenses to drop month-on-month during the quarter. We estimate that the absolute amount of the company's R&D expenses remained relatively stable year over year, and the operating profit margin rose slightly to 28% year over year, which is basically the same from month to month.
The new 3Q24 game performed brilliantly, or the restart increased month-on-month; the number of users launched the “Eternity” mobile game was in line with expectations, and they are optimistic that big DAU products will leverage the release of logistics and the expansion of the company's capacity level.
“Seven Day World” PC (free-to-play): Launched on mobile platforms such as Steam in early July, the peak number of people online on Steam exceeded 0.2 million (compared to the peak of 0.2 million people in the first 2 years of “Eternity”, which peaked at nearly 0.4 million people after the release).
“Eternity” mobile game: As of 7/25, the product ranked first in the iOS free game list (download ranking) for 3 consecutive days (we estimate the number of new additions in a single day), with over 3.5/1 million downloads on TapTap/Goodgame Quickburst respectively. At the same time, there are also methods such as Douyin and other platforms that buy and download directly from official channels. We estimate that the overall user base has reached 10 million. We believe that DAU products have great potential to help the company open up new market shares.
We expect the first month/annual turnover to be 1/10 billion.
In the short term, we think we can focus on a few catalytic points: 1) the “Eternity” mobile game's subsequent streaming transformation, release, and sustainability; 2) the “16 Sounds of Yan Yun” launch schedule within the year; 3) the “Seven Day World” mobile game launch plan, etc.
Profit forecasting and valuation
Considering the previous delay in the PC launch of “The Sixteen Sounds of Yan Yun”, non-GAAP net profit was slightly lowered by 2%/2% to 32.7/36.4 billion yuan. The current stock price corresponds to 13/12 times Hong Kong stocks and 13/12 times the 24/25 non-GAAP P/E for US stocks. Maintaining an outperforming industry rating and target price of HK$206/$133 (SOTP valuation method, HK/US stocks 18/16 times 24/25 non-GAAP P/E), with an upward margin of 39.5%/41%.
risks
The macroeconomy is sluggish, regulatory policies are becoming stricter, the game launch process or performance falls short of expectations, cost and cost investment exceeds expectations, overseas competition intensifies, and there is a risk of exchange rate changes.