Q2 revenue was 4.481 billion (yoy +12.16%, qoq -5.65%). The year-on-year increase was mainly due to the good performance of the company's mobile game businesses such as “Seek Daichi”, “Domination”, and “Soul Prologue”, which led to an increase in revenue. Q2 gross profit margin 77.4% (yoy-1.4pp, qoq-4.3pp). Sales expenses were 2.469 billion (yoy +4.55%, qoq -14.6%), mainly due to the company continuing to increase traffic for games such as “Seek Daichi”, “Domination”, “The Unknown Man”, and “Soul Prologue”; management expenses 0.107 billion (yoy -17.97%, qoq -43.1%); R&D expenses 0.176 billion (yoy +6.76%, qoq +0.34%). Net profit was 0.648 billion yuan (yoy +43.63%, qoq +5.25%). We believe the changes were mainly due to 1) the increase in web game operating costs compared to the same period of the previous year, mainly due to an increase in game licensing fees; 2) the increase in server costs over the same period of the previous year, mainly due to the increase in the number of active users of games such as “Seek Out the Thousand,” “The Unknown Man,” and “Soul Prologue,” which increased server visits, which in turn increased bandwidth resource consumption.

24H1's domestic revenue of 6.33 billion (yoy +33.81%) is mainly due to the increase in the turnover of mini-games such as “Seek Daichi”. Gross profit margin 81.2% (yoy-1.0pp). Mainly due to the increase in the proportion of proxy games and the increase in server bandwidth costs due to small games. Q3 We expect the launch of proxy apps such as “Legend of the Three Kingdoms” and “Time Grocery Store” to enhance diversified revenue from non-placeable games. In the future, we expect the launch of the blockbuster game “Dora Continent: World of Soul Hunters” from the end of '24 to the beginning of '25 to contribute to revenue growth and optimize gross margin trends.

24H1's overseas revenue was 2.9 billion (yoy -4.27%) and gross profit margin was 76.1% (yoy+3.3pp). The company consolidated its racetrack advantages such as MMORPG, SLG, cards, and simulated management, and continued to explore casual game market opportunities, and the overseas business developed steadily. While retaining the core experience of the previous game “Puzzles & Survival,” “Puzzles & Chaos” has greatly improved its artistic and special effects performance. Since its launch, it has continued to make breakthroughs in overseas markets, and has repeatedly ranked among the top 20 best-sellers in strategy categories in various regions around the world.

In Q3, the company expects to optimize the diversification of categories. It is expected that with the launch of “Doulo Continent”, the share of self-developed games will increase, thereby optimizing gross profit margins. We forecast that the company's net profit for 24-26 will be 2.503/3.012/3.539 billion (the previous value was 3.914/4.468 billion, the gross profit margin was lowered due to the increase in the share of agent games, and the profit forecast was adjusted due to delays in product progress). Since entering the second half of the year, we will give the company a target price of 16.32 yuan based on the 25-year adjusted average P/E12X of comparable companies, maintaining the “gain” rating.

Risk warning

Risk of flow falling short of expectations; policy risk; risk of increasing purchase volume costs; R&D risk; return on investment risk