Investment advice

IGG 1H24's revenue also increased 9% to HK$2.735 billion; net profit to mother of HK$0.331 billion and non-IFRS net profit of HK$0.347 billion, both reversing losses year over year. 1H24 non-IFRS net profit was better than our expectations, mainly because gross margin was better than expected, and cost control was effective. Considering that the “Doomsday” and “Viking Rise” (later “VR”) business flow continues to grow at a high rate, and that the company has achieved positive profits for two and a half years in a row, we believe that the company is expected to operate these games and apps on the long-term basis to achieve continuous release and even growth on the profit side. The company currently trades 6.2/5.5 times the 24/25 non-IFRS P/E, which is 10 times lower than the average P/E of Hong Kong stock game companies. The rating was upgraded to outperform the industry, maintaining a target price of HK$4.16 and an upward margin of 28%. The reasons are as follows:

The growth rate of “Doomsday”, “VR” and app business flows is impressive, driving the company's growth.

On the gaming side: 1) “Doomsday” 1H24 earned HK$0.493 billion, up 97%/15% from the same period, and turnover continued to grow. According to the company's official website, the turnover in July was HK$0.1 billion. 2) “VR”'s 1H24 revenue of HK$0.309 billion increased by 151%/8%; according to the company announcement, the company began increasing its marketing investment in August, and the turnover in August is expected to exceed HK$80 million. App business 1H24 revenue was HK$0.409 billion, up 116%/5% from the same period. According to the company announcement, driven by the platformization effect of the app business, turnover rose to HK$0.12 billion in July. The total revenue from the above two game and app businesses accounted for 44.3% of 1H24's revenue, effectively offsetting the decline in sales of the Evergreen product “Lords Mobile” and driving 1H24's revenue to increase by 9%. We believe that the above two game and app businesses are expected to continue to grow at a high rate under the company's operations, driving the company's overall revenue to continue to rise.

Costs and expenses have been optimized, profit release has exceeded expectations, and the company's profitability has increased. 1H24's gross margin increased 6.5/2.4ppt to 78.8% month-on-month respectively, mainly due to the increase in the share of high-margin app business. At the same time, cost control was effective. Sales/R&D/management expense ratios decreased by 16.2/5.6/0.4ppt to 44.7%/14.4%/6.0% year-on-year, respectively. We expect the company to continue to achieve a good level of gross profit margin and control expenses. Although the absolute value of sales expenses may be affected by product promotion needs, we believe that the company is expected to achieve a good input-output ratio, thereby controlling a relatively stable sales expense ratio. We believe the company's profitability is likely to continue.

What is our biggest difference from the market? The market believes that the stability of the two new games is weak. We believe that the current turnover of the products has entered a relatively stable cycle, and profits are expected to gradually be released if purchase volume control is effective.

Potential catalysts: Steady profit release capacity, “VR” and app business flow growth.

Profit forecasting and valuation

Considering product flow and the company's profit margin were better than expected, the 2024/25 non-IFRS net profit was raised 26%/24% to HK$0.617/0.692 billion. The current stock price is trading 6.2/5.5 times the 2024/25 non-IFRS P/E. It was upgraded to outperform the industry rating. Due to the decline in the industry valuation center, the target price was maintained at HK$4.16, which is 8/7 times the 2024/25 non-IFRS P/E, with an upward margin of 28%.

risks

The continuity of the new travel and app business fell short of expectations. Sales of major products declined, spending was higher than expected, geopolitical and regulatory risks, and macroeconomic pressure.