The performance fell within the forecast range and fell short of our expectations

The company announced 1H24 results: revenue of 0.526 billion yuan, down 15% year on year and 21% month on month (profit forecast range is 5.2 to 0.53 billion yuan); loss for the period was 72.33 million yuan, which narrowed year over year (net profit forecast loss of 6,900 to 79 million yuan, 1H23 loss of 80.94 million yuan); net loss to mother of 70.57 million yuan, 1H23 was a loss of 69.32 million yuan. The results fell within the profit forecast range, slightly lower than our previous expectations, which we believe was mainly due to the higher than expected scale of promotion expenses.

Development trends

“Floating Memories Remembered” promotes 1H24 circulation and increased circulation. The company stated that the main reasons for the 1H24 revenue increase were: 1) the increase in revenue from the launch of “Fusheng Yilong” in mainland China in January and the increase in turnover in the March/June launch in the Hong Kong, Macao, Taiwan/South Korea region; 2) the increase in mini-games: the monthly turnover of “Ling Yunnuo” has exceeded 10 million yuan for many months.

Losses in the first half of the year due to promotion expenses, etc., are expected to turn into profit in a single month from May to June; fee control continued, and R&D and management expenses were reduced year-on-year. The 1H24 sales rate increased by 10ppt to 54.6%; the absolute amount increased by 4% to 0.287 billion yuan. The company stated that 1H24 losses are: 1) the revenue of old games naturally declined as the life cycle progressed; 2) the new game “Exquisite” generated large promotion costs when it was launched. Considering the gradual recovery of related new game launches, we estimate that the company will gradually achieve a monthly profit from May to June. R&D expenses fell 4.5% to 0.153 billion yuan in 1H24. The company stated that it was mainly due to: 1) reduction in sound animation expenses; 2) reduction in share-based R&D personnel remuneration expenses. As of the end of FY23, the number of personnel at 1H24 had decreased by 201 to 875. We believe that 2H24 management, R&D expenses, etc. may be further effectively controlled.

The game category is gradually expanding. In the second half of the year, we will focus on “Mo Sword River and Lake”, mobile game sales, and new app game reserves. Attention in terms of mini-games: 1) “Dulala's Advancement Chronicles” is gradually being launched. Up to now, it has entered the top 100 WeChat Mini Game Bestsellers; 2) the “Mo Sword River and Lake” minigame version is under development; 3) “Code Name: Ruins”, “Code Name: Cute Pet”, and “Code Name: Island” are being developed and prepared. New app games: 1) “Mojiangjianghu”, which was launched in July, entered the top 50 best-selling iOS games in the first month. We expect the first month's turnover of the product to be in the 10 million yuan range; 2) “Violent Kitchen” (tested from August 8 to 22, and has obtained a version number); 3) 1 to 2 other models are under development and reserve. Judging from the company's current reserves and the fact that some new games have been launched, there have also been some breakthroughs for women. For example, “Mo Sword River and Lake” is a male-oriented martial arts game. We also suggest paying attention to the company's open space after category expansion.

Profit forecasting and valuation

Taking into account “Ling Long”'s relatively weak performance and significantly higher promotion expenses than expected, the 2024/25 net profit was lowered by 89% and 23% to 15.39 million yuan and 139 million yuan. The current stock price corresponds to 6.8 times the 2025 price-earnings ratio. Maintaining an outperforming industry rating, we lowered our target price by 42% to HK$0.62 (considering that the company's new mini games were only gradually launched at 2H24, switching to 8 times the 2025 target P/E) due to profit forecast adjustments and a 25% upward margin.

risks

Gaming performance falls short of expectations, macroeconomic downturn, industry regulatory policy risks, and liquidity risks.