Revenue for the second quarter of 2024 was in line with our expectations, and operating profit exceeded expectations

Jinshan Software announced results for the second quarter of 2024: revenue increased 13% year over year to 2.47 billion yuan, in line with our expectations; operating profit increased 18% year over year to 0.794 billion yuan, corresponding to operating profit margin of 32%, exceeding our previous expectations, mainly due to the optimization of division operating margins and the increase in the share of the game business. As of the end of the second quarter of 2024, the total amount of cash, cash equivalents and short-term investments on the Group's accounts was about $23.6 billion; in the first half of 2024, the Group's operating cash flow had a net inflow of $1.37 billion.

Development trends

Gaming: Strong growth in the second quarter, highlighting the resilience of flagship IPs. Game business revenue increased 20% year over year to 1.29 billion yuan in the second quarter, mainly due to the outstanding contribution of “Dusky White Forbidden Zone” and the successful launch of “Sword Net 3: Unbounded”, which was partially offset by a decline in “Sword Net 3” mobile revenue (high base for the same period last year). The mobile version of “Sword Net 3 Unbounded” was officially launched on all platforms in June, achieving data inheritance and interoperability across all platforms of the flagship mobile game “Sword Net 3”, and the number of daily active users on all platforms reached a record high. According to official public account data, the number of active users in the first month of the “Sword Net 3 Unbounded” public beta reached 11.46 million, including 6.91 million returning game users, accounting for 60%. We believe that the return of dormant old users has further raised the baseline for long-term operation of flagship IPs. The company plans to celebrate the 15th anniversary of “Sword Net 3” in August and launch a new documentary in October to continue to strengthen the vitality of the flagship IP. Along with the resilient performance of flagship IPs and steady breakthroughs in new tracks, we expect the company's gaming business revenue to record a year-on-year increase of more than 20% throughout the year.

Office: Growth needs to be repaired urgently. Office business revenue increased 6% year on year to 1.19 billion yuan in the second quarter. The year-on-year growth rate slowed down, mainly disrupted by the convergence of demand for B-side localization and the short-term transformation of the subscription system. In terms of the personal subscription business, the company optimized the product-side cloud integration experience, and user activity increased. In terms of institutional business, institutional subscription business revenue slowed in the second quarter due to the marginal contraction of IT spending budgets of downstream enterprises and the transformation of the company's pure subscription system; the convergence in demand for localized procurement also dragged down institutional licensing revenue.

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Profit forecasting and valuation

Considering that the game business performance exceeded expectations, the 2024 and 2025 revenue forecasts were raised by 5%/3% to 10 billion yuan/11.3 billion yuan; since the increase in operating margin was better than expected, the net profit forecast to mother was raised by 38.9%/25.3% to 1.4 billion yuan/1.7 billion yuan. Maintaining an outperforming industry rating; despite the increase in profit forecasts, considering the decline in the industry valuation center, and maintaining the target price of HK$30 after excluding changes in share capital (based on the 2024 SOTP valuation, considering that the A/H valuation difference for office business narrows as market value declines, the group discount rate was lowered from 47% to 42%; corresponding to 26 times the 2024 price-earnings ratio). Currently, the company is trading 17 times the 2024 price-earnings ratio, corresponding to 49% upside.

risks

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