Incident: Perfect World announced the results for the first half of 2024. The company achieved operating income of 2.76 billion yuan, a year-on-year decrease of 38.12%; realized a net loss of 0.177 billion yuan to mother, which turned profit into loss year on year; deducted non-net loss of 0.235 billion yuan, turning profit into loss year on year. Among them, 24Q2 achieved operating income of 1.431 billion yuan, a year-on-year decrease of 44% and a month-on-month increase of 8%; net loss of 0.077 billion yuan was deducted from non-return to mother, which turned profit into loss year-on-year, and reduced loss by 51% month-on-month.

Affected by the natural decline in the flow of old games and the optimization of the talent pool, the company's overall gaming business is under pressure. The company's 24H1 game business achieved revenue of 2.65 billion yuan, a year-on-year decrease of 27%; deducted non-net loss of 0.155 billion yuan, turning profit into loss year-on-year. We believe that the main reason is (1) the number of games in stock was affected by the product life cycle, which naturally declined compared to 23H1; (2) the company optimized its talent pool, which generated related expenses and affected current profits; (3) the company's “One Punch Man: World” was publicly tested in many overseas countries and regions, and the overall performance fell short of expectations, affecting current results.

The game has plenty of reserves, so it is recommended to pay attention to testing and launch performance. Looking backwards, we believe that the company is quite rich in game reserves. Among them, it is expected to launch in 2024 (1) the “World of Immortals” mobile game will be released at the end of July to show players multi-dimensional tuning results such as fashion, NPCs, combat, and economy, and have received good feedback; (2) “Demon Continent” has been launched in some overseas regions, and will soon be officially launched in Hong Kong, Macao, Taiwan and other overseas regions; (3) “Divergent Asia Million” has been released. “King Thor: Ring” will be released on August 29th Open beta has begun in Hong Kong, Macao, and Taiwan; it is expected to launch in 2025 (1) the supernatural urban open world RPG game “Alien” developed by the Magic Tower team. The product first debuted in July and received high attention, and the number of reservations exceeded 2.8 million in the first week; (2) “Zhi Xian 2” launched a paid file deletion test at 24M8, which is currently in the optimization stage. We believe Perfect World is expected to maintain its MMO advantage while expanding new game categories through new products such as “Alien Ring” and gaining all new users. It is recommended to keep an eye on the progress of game reserves.

Investment advice: We expect the company to achieve revenue of 6.648/7.358/8.024 billion yuan in 2024-2026; net profit to mother of 0.29/0.567/0.757 billion yuan; corresponding PE is 66.7/34.1/25.6 times, respectively. The company's personnel optimization is nearing its end, and the launch of key products is expected to drive upward performance and maintain a “buy” rating.

Risk warning: Product flow falls short of expectations; launch progress falls short of expectations; economic recovery falls short of expectations; industry policy changes.