Matters:
Financial situation: The operating situation is stabilizing. 2Q24 achieved revenue of 4.5 billion yuan, YOY +12%, QOQ -6%; realized net profit to mother of 0.65 billion yuan, YOY +44%, and QOQ +5%. On the cost side, GPM of 77%, YOY-1pct, and QoQ-4pct were achieved this quarter. The decline in gross margin was mainly due to an increase in share costs (we expect an increase in the turnover of agent products such as “Seek Daichi”) and an increase in bandwidth costs (mainly reflecting the growth of DAU for applet games). On the cost side, sales expenses of 2.47 billion yuan, YOY +5%, and QOQ -15% were achieved this quarter, corresponding to sales expenses of 55%, YOY-4pct, and QoQ-6pct.
Q2 maintained a large dividend ratio of 72%. 24H1 achieved net profit of 1.27 billion yuan to mother, with a cumulative cash dividend of 0.92 billion yuan in the first half of the year, corresponding to a dividend rate of 73%; of these, Q2 paid 0.466 billion yuan in a single quarter, with a dividend rate of 72%.
Commentary:
Revenue split: Domestic mobile game business drives growth, and overseas business is stable month-on-month. Looking at the breakdown, 24H1's mobile game business achieved revenue of 9 billion yuan, YOY +20%, and HOH +6%; the page game business achieved revenue of 0.2 billion yuan, YOY -16%, and HOH -12%. Looking at the subregion, the 24H1 domestic business achieved revenue of 6.3 billion yuan, YOY +34%, and HOH +5%, which was the main driving force for growth; overseas business achieved revenue of 2.9 billion yuan, YOY -4%, and HOH +4%, which remained stable.
The basic version of the applet game is stable, and many new games have been launched. According to data from the Game Industry Committee, the 24H1 applet game market was 16.6 billion yuan, an increase of 60.5% over the previous year, showing a significant boom, and the growth rate was much higher than 2% of the market. In the company's basic inventory, “Seek Out a Thousand” shows the characteristics of a long life cycle. Recently, it still ranks 2nd in the WeChat Mini Game Bestseller List. In addition, new products such as “The Unknown Man”, “Master of Swords”, “Martial Arts Breaker”, and “Demon Warriors” have been launched successively this year, providing increased turnover.
New app game products have been launched steadily, and subsequent pipeline reserves are abundant. On the app game side, the company has launched various products during the year, such as “Time Grocery Store,” “Legend of the Three Kingdoms: Honghu Domination,” “PrimalConquest: Dino Era,” and “Yes Your Highness.” Looking ahead, the pipeline is still rich in product reserves, including self-developed products such as “Doulo Continent: World of Soul Hunting”, “Code Name Battle Song M”, and “Code Name MLK”, as well as proxy products such as “Ragnarok: Conquest”, “Age of God”, and “Ancient Flood Resolve”.
Profit forecast and investment advice: Based on the current quarter's operating conditions, we adjusted our 24-26 revenue forecast to 18.9/20.8/22.7 billion yuan (the original forecast was 19.1/21.2/23.3 billion yuan), YOY +14%/10%/9%; the net profit forecast to the mother was 2.7/2.9/3.1 billion yuan (the original forecast was 2.8/3.1/3.4 billion yuan), and YOY remained flat/+9%/+7%.
Our lower limit gave the company a 24-year target valuation level of PE 15x, and the upper limit gave PE 17x, corresponding to a target market value of 39.8/45.1 billion yuan, respectively, and a target price range of 17.93/20.32 yuan. Maintain a “recommended” rating for the company.
Risk warning: macroeconomic fluctuations, increased industry competition, and product performance falling short of expectations.