Incident: The company released its 2024 semi-annual report. 2024H1 achieved operating income of 2.76 billion yuan, a year-on-year decrease of 38.12%; realized net profit to mother of 0.177 billion yuan; and realized net profit deducted from non-mother of 0.235 billion yuan. The main reasons affecting the company's performance in the first half of the year were: 1) game flow fell short of expectations; 2) the film and television business lost losses after deducting unusual profits and losses; 3) the company consolidated its office space and caused a one-time rental refund loss. 2024Q2 achieved operating income of 1.431 billion yuan, a year-on-year decrease of 44.02% and a month-on-month increase of 7.66%; realized net profit to mother of 0.147 billion yuan; realized net profit deducted from non-mother of -0.077 billion yuan, and losses narrowed month-on-month.

Stock game traffic naturally declined, and the innovative game “Persona” was launched. With 2024H1, the game business achieved revenue of 2.65 billion yuan, net profit attributable to mother - 0.166 billion yuan, and net profit not attributable to mother - 0.155 billion yuan.

The losses in the game business in the first half of the year were mainly due to 1) the natural decline in game traffic in operation; 2) “One Punch Man: World” was tested in many overseas countries and regions, and the performance fell short of expectations; 3) the company sorted out the talent pool and optimized personnel, which generated related expenses. In April 2024, the Alien Urban Adventure JRPG game Persona: The Phantom of the Night was publicly tested and received good feedback, and the company took the opportunity to expand its young user base. Following “Tower of Fantasy”, the company went further in the R&D, distribution and operation of innovative categories and two-dimensional tracks.

The game first saw results when it went overseas, and multi-terminal products were distributed globally. 2024H1 achieved overseas revenue of 0.28 billion (YoY -3.75%), and the share of overseas revenue in total revenue increased by 3.63 pct to 10.16% year over year. The company promotes a global multi-terminal integration route, moving from the PC side and the host side to resonate with the mobile end. In February 2024, the action-adventure RPG game “One Punch Man: World” simultaneously began public testing on PC and mobile platforms in various countries and regions such as Southeast Asia, Europe, and the United States. In April 2024, “Persona: The Phantom of the Night” was launched simultaneously on PC and mobile in South Korea, Hong Kong, Macao, and Taiwan. Pre-download the game and it reached the top of the App Store and Google Play free games list. In the future, the company's “multi-terminal concurrent and global expansion” game expansion process will be further deepened.

The film and television business focuses on “improving quality and reducing quantity”, and reserve projects are progressing steadily. 2024H1, the film and television business achieved revenue of 89.6046 million yuan, and realized net profit of 88.9574 million yuan, including non-recurring profits and losses such as Universal Pictures assets disposal income. After deducting non-recurring profit and loss, the net profit of the film and television business was -17.6174 million yuan.

The company's film and television business adheres to the line of boutique content and focuses on the strategy of “improving quality and reducing quantity”. TV dramas such as “Little Days Since This Year” “Today's They Are the Executive Judge” and many short dramas, such as the New Year's “Bright Moon and Fire”, have been broadcast one after another, and have both been popular and well received in the market. Furthermore, the company's reserves of film and television productions such as “Love Shanghai Junlan” and “Just a Dream of the River” are in the process of being produced, distributed, and broadcast.

Profit forecast: The global distribution of the company's multi-terminal products is beginning to bear fruit. Considering the company's current game schedule, we lowered our profit forecast. We expect the company to achieve operating income of 5.609/6.563/7.285 billion yuan in 2024-2026, up -28.0%/17.0%/11.0% year on year; achieve net profit to mother -0.328/0.13/0.377 billion yuan, up -166.8%/139.5%/191.1% year over year, corresponding to PE-44/110/38x, maintaining a “buy” rating.

Risk warning: risk that product performance falls short of expectations; industry competition increases risk; policy regulation risk.