1H24 results fall short of our expectations

The company's 1H24 revenue also increased 9% to 0.439 billion yuan, with a loss of 0.124 billion yuan during the period (1H23 loss of 0.233 billion yuan, which narrowed the year-on-year loss), and a non-IFRS net loss of 0.12 billion yuan (1H23 lost 0.215 billion yuan, narrowing the year-on-year loss). The overall performance was slightly lower than our expectations. We think it was mainly due to: 1) higher expenses than expected; 2) 1H24 is still only one of the main “Shiny” products, and the new 2H24 game cycle has started.

Development trends

1H24 “In the Name of Shining” helped increase revenue year over year. The company's 1H24 revenue increased 9.2% year over year to 0.439 billion yuan. We believe that due mainly to the launch of the mainland China version of “In the Name of Shining” in March 2023, the current overall performance is steady, the iOS game bestseller list is still in the top ten, and the user base is relatively strong; at the same time, the first half of this year contributed for a full 6 months, achieving a year-on-year increase in revenue.

Net losses narrowed year over year but increased month-on-month, and expenses are expected to remain large. The company's 1H24non-IFRS net loss was 0.12 billion yuan (2H23 loss was 67.91 million/1H23 loss was 0.215 billion yuan). We believe that from the product side, 1H24 losses increased month-on-month, mainly due to a slight natural decline in sales of “In the Name of Shining” and the fact that new games have not yet been launched, investment such as R&D expenses continues. Specifically, at the level of individual expenses: 1) 1H24 sales expenses increased 5% year over year to 0.173 billion yuan, which we think was mainly due to the “Shining Name” anniversary event and the company's other related spontaneous game promotion investment; 2) R&D expenses of 1H24 decreased 11.7% to 0.264 billion yuan year over year, and the rate increased by 4ppt to 60% month-on-month.

New tours are ready for the second half of the year, so keep an eye on the performance. “Dragons: Kassel's Gate” is scheduled for omni-channel public beta 1 on September 12 (original project E, self-developed, card RPG game). The company also revealed in the semi-annual report that it will launch “Walking the Wind” within 2024 (original project code IM, existing version, numerical RPG game, original IP). We recommend focusing on the driving effect of these two products on the company's 2H24 revenue and profit performance.

Looking ahead to 2025/26, the company also has 3/2 game reserves. Among them, the 2025 MMORPG+ games “Project Code: Odin” (adaptation of the Dragon Clan series novel) and “Project F” (Open World Pet Construction) are already in the game production stage.

Profit forecasting and valuation

As sales expenses were higher than expected and the flow of old games declined, we lowered our expected non-IFRS net profit of 0.046 billion yuan to a loss of 0.08 billion yuan in 2024, leaving the non-IFRS net profit unchanged at 0.107 billion yuan in 2025. The current share price corresponds to 7.2 times the 2025 non-IFRS price-earnings ratio. Maintaining an outperforming industry rating and maintaining a target price of HK$1.60, corresponding to 10 times the 2025 non-IFRS price-earnings ratio, with an upward margin of 39%.

risks

The launch process and performance of the new game fell short of expectations, purchasing volume exceeded expectations, relationships with third party publishers deteriorated, macroeconomic uncertainty, industry policy risks, and liquidity risks.