Key points of investment

Incident: In the first half of 2024, the company achieved operating income of 1.96 billion yuan, a year-on-year decrease of 16.57%, and net profit to mother of 0.518 billion yuan, a year-on-year decrease of 23.4%; Q2 revenue and net profit to mother both improved month-on-month. The company plans to pay a cash dividend of 45.00 yuan (tax included) for every 10 shares in the current period, with a total discovery dividend of 0.323 billion yuan (tax included), accounting for 62.36% of net profit due to the current period; the combined share repurchase of 0.045 billion yuan (excluding transaction fees) accounts for 71% of net profit due to mother in the current period, with no increase.

Deepen the game market and expand the product matrix with self-developed games as the core. The company developed a variety of games based on traditional Chinese culture, such as “Enquiry”, “Enquiry Mobile Game”, and “Happy Thinking”. There are two types of game products: self-developed and proxy. The operating models include independent operation, joint operation, and authorized operation. Among them, since the company did not set up an operation team at the beginning of the launch, the self-developed game “Enquiry” mobile game authorized external operators to operate, and most of the remaining self-developed products and proxy products use independent operation and joint operation models. Core product status: “Enquiry” has continued to operate for 18 years since 2006, with steady performance; in April 2016, the MMORPG game “Wendao Mobile Game” was launched, which has been running steadily for 8 years; in February 2021, the mobile game “One Thought Getaway” was launched, which has been a stable iterative update for 3 years. In 2023 and January-June 2024, the total revenue of the three products, “Wendao” mobile game, and “Easy Thinking (Mainland Edition)”, accounted for 71.19% and 68.17% of revenue, respectively. The revenue of the current edition of the “Ask” mobile game increased year-on-year. “Flying Dragon Knight (Mainland Edition)”, which was launched in August 2023, as well as “Super Evolution Story 2” and “Pikatang's Dream Origins”, which were launched in December 2023, contributed incremental revenue and profit compared to the same period last year.

Boutique operation strategies and rich IP culture build a game ecosystem. The company's self-operated platform, Thunder Games, has operating experience in MMORPGs, Roguelike, Hang-Up, and Community Development, with user experience as the core.

“Purchase volume” is one of the effective promotion methods for game product promotion, but its cost affects game product profits. The company acquires customers through various methods, including daily live streaming, KOC promotion, content construction, e-commerce and community return acceptance, etc., to effectively reach target users and avoid excessive reliance on the “purchase volume” strategy. Develop IP construction to improve the game worldview and enhance the player experience. “Ask Me Mobile Game” is a classic IP work. It enriches game stories through series derivatives such as novels, audiobooks, peripherals, and player series micro-movies. “One Thought Is Easy” creates an original IP for Guofeng Xiuxian, and enriches the game's content and story line with derivative content such as music, comics, novels, and animations. Since the launch of the spin-off IP animation “Here Comes Easy”, it has continued to be updated on platforms such as Douyin, Kuaishou, and B, and the cumulative number of fans on all platforms has exceeded 3.2 million; in addition, the game continues to accumulate users over a long period of time through IP content, and has launched content such as the brand film “Mortal Man Is Extraordinary”, the comic “Immortal Magic”, the game Impressionist “A Song of God”, and the animation “Little Medicine Boy Wants to Be a Fairy”.

Game product reserves are abundant, and overseas business performance is excellent. Reserve status: A total of 4 self-developed products have obtained edition numbers. Among them, “The Legend of the Sword and Sword” is scheduled to be launched in the first half of 2025; a total of 6 proxy products have obtained version numbers. Among them, “Fengshen Fantasy World” is scheduled to be launched on October 18, 2024, and “The Cairo Omnipotent Operator” and “Wangdu Genesis Record” are scheduled to be launched in the second half of 2024. Overseas business: Total revenue of 0.255 billion yuan, a year-on-year increase of 113.77%. Since 2024, products such as “Monster Never Cry (European and American version)”, “Outpost: Infinity Siege (international version)”, and “Outpost: Infinity Siege (Steam International Edition)” have been distributed overseas, and various products such as “Legend of the Sword and Sword (code name M88)”, “Attack the Primitive”, and “Hundreds of Millions of Light Years” are currently being distributed overseas.

Continue to invest in R&D to enhance the gaming experience in multiple dimensions. As a cultural and entertainment consumer product, providing users with a fresh and fun experience is the core competitiveness of games. Adopt the “small step run fast” strategy to improve the effectiveness of the finished product developed. Verify the core gameplay from the demo version, verify the viability of innovative designs, and control R&D costs. The Demo extension became the final project, optimizing and adjusting the “Little Step Fast” development mechanism. The company focuses on building a R&D center, setting up a technology center, art center, audio department and testing center, focusing on cutting-edge technology related to AI, integrating AI technology into game development processes such as planning, development, and testing to improve R&D efficiency and game experience. Focus on R&D investment and R & D talent development. In the current period, R&D expenses were 0.391 billion yuan, accounting for 19.96% of revenue. The size of the R&D team is expanding year by year. The number of R&D personnel at the end of 2022, the end of 2023, and the end of the reporting period was 692, 855, and 871, respectively, accounting for 55.18%, 59.09%, and 59.54% of the total number of employees, respectively.

Investment suggestions: The company is deeply involved in the game industry. Its core products have been operating steadily for many years, actively participating in game research and development. The acquisition and release of new game versions has been carried out in an orderly manner, and overseas business performance is outstanding. On the policy side, the State Council recently issued the “State Council's Opinions on Promoting the High-Quality Development of Service Consumption”, which mentions improving the development of new business formats such as online literature and online games, and supporting the development of e-sports. We forecast that the company's net profit from 2024 to 2026 will be 1.081/1.218/1.389 billion yuan; EPS will be 15.00/16.90/19.29 yuan; PE will be 12.0/10.6/9.3; initial coverage, with a “buy-A” recommendation.

Risk warning: industry policy risks, risk of dependence on a few products, macroeconomic downturn, overseas business operation risks, risks associated with increased market competition, etc.