Incident: 37 Mutual Entertainment released its 2024 interim report. During the reporting period, total operating income was 9.232 billion, up 18.96% year on year, net profit to mother was 1.265 billion, up 3.15% year on year, net profit after deducted from mother was 1.275 billion, up 14.27% year on year, and net operating cash flow was 2.129 billion yuan, down 8.22% year on year.

Dividends: A cash dividend of 2.10 yuan (tax included) and a cash dividend of 465,751,499.01 yuan is distributed to all shareholders for every 10 shares.

Comment: The mini game business drives revenue growth

1) Mobile game business: In the first half of 2024, the company achieved mobile game business revenue of 8.959 billion, an increase of 19.82% over the previous year. The increase was mainly due to the good performance of the company's mobile game business such as “Search for Daqian”, “Hegyo” and “Soul Prologue”. “Seek Out the Thousand” remained in the top 2 of the WeChat Mini Game Bestsellers. During the reporting period, the anniversary version of “Find a Thousand” was launched. Through team social networking and gameplay, the depth of content was enhanced, user stickiness was enhanced. Well-known IPs such as “The Birth of a Child” Conduct deep linkage. Mobile gaming gross margin level was 80.98% in the first half of 2024, an increase of 2.15 percentage points over the same period last year.

2) Overseas revenue remains stable. In the first half of 2024, the company's overseas revenue was 2.898 billion, a slight decrease of 4.27% over the previous year. Relying on years of experience in overseas games, the company consolidated its advantages on the racetrack such as MMORPG, SLG, cards, simulation management, etc., and continued to explore casual game market opportunities. Since its launch in 2020, the ace game “Puzzles & Survival” has accumulated over 10 billion yuan in sales, and has been in the top ten best-selling lists in Japan and the top 30 in Europe and the US.

3) Product reserves: At present, the company has a rich stock of products in MMORPGs, SLG, cards, simulation management, etc., covering diverse themes such as Western fantasy, Oriental fantasy, Three Kingdoms, modernity, and antiquity. Among them, various mobile games, including the Guoman Oriental fantasy MMORPG “Doulo Continent: Soul Hunting World”, the ancient style ink simulation management “The Son-in-law”, and the picture book cartoon Guofeng simulation management “The Big Explosion of Time”, have received domestic game versions.

The sales expense ratio continued to rise: in the first half of 2024, the company's sales expense ratio was 58.06%, up 2.92 percentage points from the same period last year; the management expense ratio was 3.2%, down 0.11 percentage points from the same period last year; and the R&D expense ratio was 3.8%, down 1.2 percentage points from the same period last year. The increase in the sales expense ratio is mainly due to the company's continued increase in traffic for games such as “The Search for a Thousand,” “Domination,” “The Unknown Man,” and “Soul Prologue.” The decline in R&D cost rates is mainly due to the company adjusting its personnel structure according to strategic game categories, increasing investment in strategic categories such as strategy, and reducing R&D investment in individual non-strategic categories.

Profit forecast and valuation: Considering the rapid expansion of the company's mini game business, revenue expectations were raised appropriately, but due to intense competition on the mini game circuit, the company's sales expenses ratio increased significantly, so profit expectations were lowered appropriately. The company's revenue for 2024-2026 is expected to be 19.707 billion (originally 17.84 billion), 20.607 billion (previously 19.521 billion), and 21.164 billion, respectively, up 19.1%, 4.6%, and 2.7% year-on-year. Net profit was 2.538 billion (previously 3.638 billion), 2.836 billion (previously 4.073 billion), and 2.958 billion, respectively, with year-on-year increases of -4.5%, 11.8%, and 4.3%. The current market value is 12x, 11x, and 10x for 2024-2026 PE, maintaining a “buy” rating.

Risk warning: 1) Game regulation policies are getting stricter; 2) Purchase costs continue to be high; 3) The risk that the information data used in the research report is not updated in a timely manner.