Brief performance review
On August 26, the company released its 24-year report, with H1 revenue of 9.23 billion/yoy +19.0%, net profit of 1.26 billion yuan/yoy +3.2%, net income of 1.27 billion yuan/yoy +14.3%; Q2 revenue 4.48 billion yuan/yoy +12.2%, net profit of 0.65 billion yuan/yoy +43.6%, net profit due to mother of 0.66 billions/yoy +48.0%, In mid-'24, the proposed cash dividend was 0.21 yuan/share. As of 1H24, the company paid 2 dividends, for a total cash dividend of 0.42 yuan/share.
Management analysis
Revenue: Applet games performed well, maintaining double-digit growth in Q2. 1) By product:
H1 mobile games 8.96 billion/yoy +19.8%, mainly the applet games “Seek Out a Thousand” and “Soul Prologue” (Douro IP) performed well, leading to an increase in revenue; the web game 0.21 billion/yoy -15.5% is expected to be mainly due to the shift of users to mobile devices+reduced investment in page games. 2) By region: Growth is mainly contributed by the domestic market, and the overseas market is steady. Domestic revenue 6.33 billion/yoy +33.8%; overseas revenue 2.9 billion/yoy -4.3%. 3) On a quarterly basis, Q2 revenue maintained a relatively rapid year-on-year growth rate. The slowdown compared to Q1 was mainly due to the relatively high Q2 base last year, -5.65% month-on-month, and steady performance in game operations.
Profit: Q2 sales rates decreased month-on-month, and net interest rates rebounded. 1H24's net interest rate was 13.7%, or 1.9 pct year over year. The main reason was that the company continued to increase traffic for games such as “Seek the Thousand,” “Overlord,” and “Soul Prologue,” which led to a sales rate of +2.9 pct year over year; however, Q2 sales rates were the same, -4.0 and -5.8pct month-on-month, driving net interest rate recovery (+3.2, +1.5pct), and net profit to mother +5.3% month-on-month. In addition, overall gross margin is stable, mainly due to changes in the revenue structure. H1 and Q2 are +1.1 and -1.4 pct year over year; management rates have not changed much; R&D rates H1 and Q2 are -1.2 and -0.8 pct year over year, mainly due to the company adjusting the personnel structure according to strategic game categories.
Looking forward to the future: Applet games are expected to continue to contribute, and rich reserves guarantee subsequent growth. 1) The success of “Quest for a Thousand” and “Soul Prologue” has given the company a prominent competitive advantage on the mini-game circuit; it has been operating on a long-term basis and has contributed steadily; it has launched new products such as “Time Grocery Store”, “Legend of the Three Kingdoms: Legend of Honghu Domination” and “Mecha Domination” over the past 24 years, which is expected to gradually contribute incrementally. 2) The company's financial report revealed 25 reserve products, 8 self-developed products, 15 sold overseas, covering topics such as MMORPGs, cards, SLG, simulation management, puzzle, etc.; at the same time, it actively lays out AI to enable game research and development.
Profit Forecasts, Valuations, and Ratings
We expect the company's net profit to be 2.56/3.39/3.65 billion yuan for 24-26, respectively, and the corresponding PE is 11.3/8.1/7.6X, maintaining a “buy” rating.
Risk warning
The launch and performance of the game fell short of expectations; release of versions fell short of expectations; regulatory risks.