1H24 results are in line with forecasts and our expectations

The company announced 1H24 results: revenue of 2.22 billion yuan (forecast 2.18-2.23 billion yuan), up 27% year on year; profit of 0.251 billion yuan (forecast 2.20 to 0.27 billion yuan); net profit to mother of 0.205 billion yuan, up 127% year on year, in line with our expectations.

Development trends

Gaming: First-party games drive high growth. In the second half of the year, we will focus on the continuity of the “Let's Go Muffin” national service, the launch process in Japan and South Korea, and the progress of research and development of new game reserves. Game 1H24's revenue also increased 29% to 1.49 billion yuan. We think it was mainly driven by the launch of “Let's Go Muffin” in Hong Kong, Macao and Taiwan (January) and mainland China (May); the stock product “Sausage Party” naturally declined, but it still contributed second place in game revenue. Looking ahead, we can pay attention. Self-research: 1) Continued distribution of “Let's Go Muffin” national service sales (the average ranking of iOS game bestsellers since August is around 30; the new Siam Cripp joint version was launched on 8/30; follow the performance of similar competitors) and the Japan-Korea launch plan (September-October). 2) “Heartbeat Town” user accumulation (as of 8/30, the product had been downloaded more than 28 million times on TapTap) and commercialization process (the first trend season began on 8/10). 3) “Ether Reboot Day” (we think it is expected to launch in 2025).

Agent: 2H24 said it will release “Daredevil” and “Advance to the Dungeon” (paid game).

TapTap: The user scale returns to the growth channel, and advertising system optimization is conducive to long-term development. At the user level, the average MAU of TapTap China's 1H24 reached 43.24 million people, a year-on-year increase of 27%, a record high in half a year. We think it's mainly driven by the launch of the company's first-party game (“Let's Go Muffin”) and frequent new games in the industry. Looking ahead to 2H24, we believe that the popularity of first-party games and summer industries such as “Heartland Town” (Big DAU) will further drive the growth of the platform MAU. In terms of monetization, judging from the external environment, we believe that the number of new games and relatively abundant advertising demand during the year will drive revenue growth. At the internal system level, the company said that 1H24 limits the TapTap ad load rate will have an impact in the short term, but it is conducive to improving the user experience and promoting community ecosystem construction and long-term platform development.

The increase in the share of self-development drives gross margin restoration, and sales rates are controlled; the R&D team may have basic adjustments in place. The gross margin of 1H24 also increased by 8ppt to 67%. Among them, the game business increased by 13ppt to 60%, and the gross margin of the TapTap business remained the same year over year. We think it is mainly due to the increase in the share of revenue from self-developed games and the decline in the share of proxy games such as “Sausage Party” (agency games require payment of shares to developers). The 1H24 sales rate is 31%, and good control is maintained when a new tour (“Let's Go Muffin”) is launched.

In terms of R&D, as of the end of FY23, 1H24 had 727 game developers, a decrease of 19. The company said that in 2024, with the launch of self-developed games and the advancement of new product projects, the game development business will stabilize, and we believe that the overall team level will also remain stable.

Profit forecasting and valuation

Maintain profit forecasts. The current share price corresponds to 12.2/12.9 times 24/25 P/E. Maintaining an outperforming industry rating and target price of HK$26.4 (16/17 times 24/25 P/E), with 33% upside.

risks

Industry policy changes, game launch progress and performance fell short of expectations, TapTap user growth slowed, commercialization fell short of expectations, and competition in overseas markets intensified.