2Q24 results are in line with our and market expectations

The company's 2Q24 revenue was 4.48 billion yuan, up 12% year on year, down 6% month on month; net profit to mother was 0.648 billion yuan, up 44% year on year, up 5% month on month, in line with our expectations and the market (6 to 0.7 billion yuan).

The company also announced a cash dividend of 0.21 yuan (tax included) per share, with a total dividend of 0.466 billion yuan. Dividends of 0.462 billion yuan have been implemented in the first quarter of this year. Together, the two during the year accounted for 73% of net profit returned to mother in the first half of the year.

Development trends

Revenue also increased in 2Q24, and leading racetrack segment products such as “Seek Daecheon” were relatively stable. Looking at 2Q24, according to the WeChat Mini Game Bestseller List, “Seek Out” basically remained in the top three in the second quarter. We estimate that the quarterly product turnover was relatively stable from month to month. In addition, “The Unknown Man” (launched in January 2024), “Spirit Sword Master” (launched in March 2024), and “Overlord” have also increased their contributions. Looking at the subregion, 1H24's overseas revenue fell 4% year on year. We estimate that the monthly turnover of “Puzzles & Survival” remains at 2 to 0.3 billion yuan. After the launch of the new game giant SLG “Mecha Domination” in Europe and the US in April, it is currently in the stage of continuous revenue accumulation, and we continue to monitor the product's breakthrough progress in the general user community.

Sales cost control is effective, and R&D investment is focused on the strategic circuit. The company's 2Q24 sales rate fell 4pp/6ppt to 55% month-on-month. Overall, it is in line with our previous expectations. Some mini game products have a certain trend of reducing investment, increasing revenue recovery. In terms of R&D, the company invested 0.176 billion yuan in R&D in 2Q24 (flat month-on-month, down 7% year on year). The company said it was mainly due to adjusting the personnel structure according to strategic game categories, increasing investment in strategy and other categories, and reducing R&D investment in individual non-strategic categories. We believe that the absolute amount of R&D investment has been stable for two consecutive quarters, which shows that the company's focus on R&D is relatively effective.

Product reserves are abundant, and the “AI three-step” strategy is gradually deepening. The company currently focuses on: 1) “Doulo Continent: World of Soul Hunting” (self-developed, with edition, Guoman Oriental Fantasy Realistic World MMORPG, first released a product video on August 23 to follow the product progress during the year); 2) “The Son-in-law” (agent, with version number, ancient style ink simulation management); 3) “The Big Bang Theory” (agent, with version number, cartoon Guofeng simulation management). On the AI side, the company gradually deepened its three-step strategy, upgraded and applied the digital intelligence product matrix to improve R&D and operation efficiency. At the same time, it was exploring the rich gameplay of AI. In the first half of the year, the company developed a casual game with AI that completed elements such as game plot, material, and dubbing.

Profit forecasting and valuation

Due to uncertain expectations for new game launches during the year, we lowered our 2024/25 net profit by 11% and 12% to 2.71/3.03 billion yuan. The current share price corresponds to 10/9 times the 2024/25 price-earnings ratio. Maintaining an outperforming industry rating, the target price was lowered by 27% to 17.9 yuan due to adjustments in profit forecasts and a downward shift in the industry valuation center, corresponding to 15/13 times the 24/25 price-earnings ratio, with 44% upward space.

risks

Demand is weak due to macroeconomic pressure, game progress or actual performance falls short of expectations, industry regulations are becoming stricter, competition in traffic operations has intensified, overseas competition has intensified, and there is a risk that the Securities Regulatory Commission will file a case.