Incident: 2024H1 achieved revenue of 2.76 billion yuan, yoy -38.12%, net profit to mother of 0.177 billion yuan, yoy -146.55%, net profit of non-return to mother -0.235 billion yuan, yoy -182.40%. Among them, 2024Q2 achieved revenue of 1.431 billion yuan, yoy -44.02%, qoq +7.66%; net profit to mother of 0.147 billion yuan, yoy -206.11%, and 24Q1 was -0.03 billion yuan; net profit without return to mother was 0.077 billion yuan, yoy -194.66%, and 24Q1 was -0.158 billion yuan; performance fell within the previously forecast range.

Embrace changes and actively adjust the team, putting pressure on performance during the painful period. Revenue side: 2024H1's revenue fell 38.12% year on year, of which: 1) The game business achieved revenue of 2.65 billion yuan, yoy -27.28%. The year-on-year decline was mainly due to a natural decline in stock product life cycle, while the public beta performance of the new game “One Punch Man: World” fell short of expectations, and incremental contributions were limited; 2) The film and television business achieved revenue of 0.09 billion yuan, yoy -88.28%, mainly due to a decrease in confirmed broadcast content. Profit side: Net profit from 2024H1 decreased by 146.55% and 182.40%, which was significantly greater than revenue. Among them: 1) Net profit from the game business -0.166 billion yuan, after deducting non-net profit of 0.155 billion yuan, which turned losses year-on-year, mainly due to a natural decline in stock product performance. The performance of the new game “One Punch Man: World” fell short of expectations. At the same time, the company actively adjusted team personnel to generate relevant talent optimization costs, corresponding to 2024H1 management expenses of 0.465 billion yuan. YOY +27.15%; 2) Net profit from the film and television business was 0.089 billion yuan. After excluding non-recurring profit and loss such as global film order disposal income and investment losses of invested companies, non-net profit was -0.018 billion yuan; 3) Intensive integration of office space caused a one-time rental refund loss.

The effects of organizational adjustments are gradually showing, and losses have gradually narrowed. 2024Q2 revenue increased 7.66% month-on-month. We believe that the net profit of the new game “Persona: The Phantom of the Night” was launched in April 2024, contributing some of the increase in the current period; net profit to the mother increased month-on-month loss, mainly due to the 2024Q1 global chip disposal brought non-revenue, while the 2024Q2 one-time loss of office space led to non-financial losses, deducting the impact of non-recurring profit and loss. The net profit of 2024Q1 and 2 deducted the net profit of non-return mother was -0.158 and -0.077 billion yuan respectively, and the effects of cost reduction and efficiency began to show.

The product pipeline is clear, and we are optimistic about the implementation of new tours in advantageous categories, and drive the restart and growth of performance. The company is actively sorting out the business layout, focusing on long-term development and core categories. The subsequent product pipeline is clear. It is expected to launch the flagship mobile game “World of Immortals”, “Divergent Million King Arthur: Ring”, the Chinese Hong Kong and Macau Taiwan Service in 2024, the new multi-terminal MMO game “Zhi Xian 2”, the supernatural city open world RPG “Alien”, and “Code Z”. In addition, products such as “Code Name Barbarian” and “Code Z” are also being actively developed. Among them, players such as “World of Immortals” and “Another Ring” have received a high level of attention, and they look forward to the launch of the company's key products one after another, contributing to increased performance.

Profit forecast and investment rating: Considering the costs brought about by the optimization of the company's team, we lowered the 2024-2026 EPS to 0.06/0.49/0.60 yuan (previously 0.46/0.66/0.80 yuan), corresponding to the current share price PE 122/15/12 times, respectively. We are optimistic that after the company team sorted out the adjustments, the efficiency of resource use will improve. Subsequent key products are all worth looking forward to, and maintain the “buy” rating.

Risk warning: old game turnover declined more than expected, new game performance fell short of expectations, industry regulatory risks