1H24 results fall short of our expectations

The company announced 1H24 results: revenue of 0.343 billion yuan, up 3% year on year; net profit to mother of 45.06 million yuan, up 9% year on year, slightly lower than expected. We believe that the main reason is that revenue performance was relatively weak and cost investment was slightly higher than expected.

Development trends

There are plenty of new agent games, and overseas game products are diverse. Looking at the 1H24 revenue split, licensed game operating revenue increased 57% year over year to 0.126 billion yuan. We think it was mainly due to the catalytic effect of “Fat Goose Gym” and “Lantern and Dungeons - Remastered”; we think it was mainly due to “The Strongest Snail” (version in mainland China/Japan), “Demon Slayer” and other old games naturally declined. The company's overseas development is relatively active. Many games are distributed to different regions around the world. 1H24's overseas revenue increased 120% year over year to 0.143 billion yuan, and the revenue share also increased 22.3ppt to 42% year over year. We believe that the company will also transfer distribution experience such as domestic community operations to overseas markets to further expand the game distribution network.

The promotion of “Fat Goose” affects marketing expenses, and changes in fair value of investment increase profits. Marketing expenses of 1H24 increased 7% year over year to 0.132 billion yuan, and the marketing expenses rate increased by 2ppt to 38.5% year over year. The company said it was mainly due to: 1) cost increases due to the launch of new games such as “Fat Goose Gym” and the remake of “Lantern and Dungeon”; 2) the increase in overseas distributors. On the R&D side, 1H24 R&D investment also increased 5% year-on-year due to an increase in R&D personnel for key game projects. Furthermore, the change in fair value of investment achieved 42.05 million yuan, making a positive contribution to the profit side. The company said it was mainly due to the increase in fair value returns brought about by investment funds and wealth management products.

The plan for the second half of the year is to focus on developing the Korean market, and focus on the progress of “Project W”, “Project HA” and “Project E” in 2025. In terms of products to be launched during the year, focus on “Blood Age (Project L)”, an RPG card game with a Western fantasy theme. The company said it plans to release this product in South Korea. Agent products to focus on in 2025 include: 1) “Project W” (2D half-turn card game, “Grand Master” IP work); 2) “Project HA” (card RPG game). In terms of self-development, the focus is on the follow-up progress of the SLG game “Project E”.

Profit forecasting and valuation

Due to the weak turnover performance of some games in the first half of the year, we cut our 24/25 non-IFRS net profit by 50% and 46% to 0.086/0.122 billion yuan. The current share price corresponds to 21/15 times the 24/25 non-IFRS price-earnings ratio. Maintaining an outperforming industry rating, taking into account profit forecast adjustments and the company may have some margin of valuation premium (subject to launch self-developed projects), we lowered our target price by 26% to HK$3.11 (considering that the launch time of the company's key agent products and self-developed products is 2025, which is 16 times non-IFRS P/E), with an upward margin of 7%.

risks

Game launch progress or turnover falls short of expectations, risk of dependency on a single product, macroeconomic downturn affecting entertainment spending, industry regulatory policy risks, and liquidity risks.