1H24 revenue was in line with our expectations and profit was slightly lower than expected
The company announced 1H24 results: revenue of 2.56 billion yuan, an increase of 29.3%; net profit to mother of 0.81 billion yuan, an increase of 11.7%. Among them, 2Q24 revenue also increased 22.1% to 1.25 billion yuan, and net profit to mother fell 11.9% to 0.38 billion yuan. Revenue was basically in line with our expectations, and the profit side was slightly lower than our previous expectations (0.405 billion yuan). We judge that it was mainly due to high investment in marketing and promotion. In addition, the company announced a 1H24 interim dividend of 0.1 yuan per share (tax included), totaling 0.213 billion yuan, accounting for 26% of 1H24's net profit to mother.
Development trends
Mobile game revenue has been rising steadily, and overseas sales are growing at an impressive rate; high growth in information services has created additional growth. 1H24's mobile game revenue increased 23.4% year over year to 2.1 billion yuan. We judge that the revenue contributed by “Monster Lian Meng” and “Legend of Sword and Fairy: A New Beginning” (app) launched on 1H24, while the steady operation of “Stone Age” launched on 2H23 is also a year-on-year increase. In addition, 1H24 distributed a variety of products overseas, such as “The New Legend of the Dragon”, “Monster Lianmeng”, and “King of Nazarek”, which drove the company's overseas revenue to increase by 335% to 0.126 billion yuan. Information services revenue increased 76.6% to 0.4 billion yuan over the same period of 1H24, accounting for 15.5% of 1H24 revenue. We believe that the basis for the company's high growth in information service revenue is years of intensive cultivation of “legendary” and “miracle” games on nostalgic racetracks, integration of category resources, and effective commercialization.
Game promotion generates marketing investment, and profit margins are affected to a certain extent. 1H24's sales expenses increased 104% year on year to 0.96 billion yuan, of which marketing costs were 0.88 billion yuan, an increase of 113% year on year; sales expenses other than marketing costs were relatively stable. Under the influence of increased investment in marketing, 2Q24's sales expense ratio increased 15/1ppt to 37.8% month-on-month. We believe that the increase in promotion investment may be related to various factors such as the launch of new games and the company's initiative to develop new channels for existing games.
2Q24 R&D and management costs are effectively controlled. Overall, in 2Q24, the company's net interest rate fell 12/2ppt to 31% month-on-month, respectively. Looking ahead, we expect that as reserve products are launched one after another starting in 2H24, the company will continue to be promoted in the market. It is recommended to pay attention to the recycling efficiency of the company's purchase volume.
Or welcome a new round of product launch and actively monitor developments such as new product performance and AI applications. We judge that many of the company's products may be launched one after another starting in 2H24. Among them, “About My Reincarnation as a Slime: New World” is scheduled to go live on August 28, and “Tomb Raider Notes: Departure” has already begun to make reservations to follow up the progress of “The Continent of Doulo: The Legend of Fighting Evil”; the agency side has plenty of reserves to keep an eye on the launch situation.
On the AI side, the company announced that its self-developed “big model” has been applied to game development.
Profit forecasting and valuation
In 2024, considering product launch slightly slower than expected, information service revenue was better than expected, maintaining revenue side forecasts. Due to higher marketing investment, net profit was reduced by 6% to 1.65 billion yuan; due to higher marketing investment than expected, the net profit margin was lowered by 6% to 1.65 billion yuan; in 2025, revenue is expected to increase by 3% to 5.9 billion yuan, taking into account marketing investment or continuation, to maintain profit side forecasts. The current share price is trading at 11/10 times 24/25 P/E. Maintaining an outperforming industry rating, the target price was lowered by 17% to 12 yuan due to a downward shift in the industry valuation center, corresponding to 16/14 times 24/25 P/E, with 40% upward space.
risks
Macroeconomic downturn, entertainment spending decreased; product launch progress was delayed, and new product performance fell short of expectations; legendary/miracle market stability risks; equity investment and goodwill impairment risks; and game industry policy supervision.