Brief performance review

On August 26, the company released an interim report. H1 revenue was 2.76 billion/yoy -38.1%, net loss to mother was 0.18 billion, profit of 0.38 billion in the same period last year; after deducting non-net loss of 0.235 billion, profit of 0.286 billion for the same period last year. Q2 revenue was 1.43 billion/yoy -44.0%, net loss 0.15 billion, profit 0.14 billion for the same period last year, deducting non-net loss of 0.077 billion, and profit of 0.081 billion for the same period last year.

Management analysis

Revenue: Gaming and video businesses are under pressure, but there was a slight increase from month to month in Q2. 1) Games:

H1's revenue was 2.65 billion yuan/-27.3% year over year. The large year-on-year decline was mainly due to old products entering maturity. Recharges naturally declined due to a natural decline in the life cycle, and the short-term increase in the contribution of new products was limited.

Q2 game revenue was 1.36 billion yuan, +6.2% month-on-month. It is expected to increase the contribution of new games launched in the first half of this year, such as “One Punch Man: The World” and “Persona: The Phantom of the Night”.

2) Film and television: H1 revenue 0.09 billion yuan/-88.3% year over year. The biggest year-on-year decline was mainly due to fewer film and television productions broadcast and confirmed in the current period; Q2 film and television revenue 0.054 billion/ +58.1% month-on-month.

Profit: Talent optimization was a drag in the short term, and Q2 deductions for non-loss narrowed. 1) H1 net profit margin -6.4% /y-o-14.9pct, net non-net interest rate -8.5% /y-14.9pct yoy, of which gross margin is +6.3pct yoy, which is expected to be mainly due to changes in revenue structure. The sharp year-on-year decline in net interest rates was mainly due to pressure on the game and film business. At the same time, the company increased resource investment in key projects, continued to optimize the talent pool, and promoted cost reduction and efficiency, which had a phased impact on current results. Management and R&D rates were +8.6 and +10.7 pct year-on-year, and H1 gaming and film and television businesses deducted non-net losses of 0.155 and 0.018 billion yuan, respectively. 2) 2Q24 net interest rate to mother was -8.0 pct month-on-month, after deducting non-net interest rate of +6.5 pct month-on-month. Profit levels increased month-on-month. Among them, management and R&D rates were -5.1 and -5.8pct month-on-month, and the impact of talent optimization gradually weakened. 3) The large amount of non-profit and loss in the first half of the year was mainly due to the disposal of Universal Pictures film assets and one-time rent-back losses due to intensive consolidation of office space.

Looking forward to the follow-up: Focus on the launch of reserve products and sorting out the company's product line and personnel. 1) Games: The company firmly focuses on “MMO+” and “Card+”. “Magic Continent” has been launched in some overseas regions and will be launched in other regions; “Divergent Million Arthur: Ring” is about to be tested in Hong Kong, Macao and Taiwan, and will be launched in other regions one after another; the mobile game “World of Immortals” is expected to be launched this year; and reserve products such as “Alien 2”, “Code Name Barbarian”, and “Code Z” are also being actively developed. Once the talent pool stabilizes, it is expected that they will go to battle lightly. 2) Film and television:

The stocked works such as “Love the Navy Blue”, “Just a Dream of Rivers and Lakes”, “Lucky Family”, “A Thousand Peaches Bloom”, and “The Night Is Intense” are being produced, distributed, and broadcast normally.

Profit Forecasts, Valuations, and Ratings

We expect the company's net profit to be 0.327/0.645/0.867 billion yuan for 24-26, respectively, and the corresponding PE is 45.1/22.2/16.5X, maintaining a “buy” rating.

Risk warning

Game and video product launches fall short of expectations; release of versions falls short of expectations; regulatory risks.