Key points of investment

Incident: 2024H1 achieved revenue of 0.845 billion yuan, yoy -24.62%, net profit to mother of 0.11 billion yuan, 0.041 billion yuan after deducting net profit of 0.125 billion yuan in the same period last year, 0.028 billion yuan for the same period last year, 3.3 million yuan during the adjusted period, and 0.199 billion yuan for the same period last year. The company's performance was lower than our expectations.

The focus on long-term games puts pressure on performance, and cost control continues to be optimized. 2024H1's revenue fell 24.62% year on year. Excluding the impact of the company's IP derivatives business, which terminated operations in 2023, 2024H1's revenue fell 23.84% year on year. Among them, the game business achieved revenue of 0.822 billion yuan, yoy -22.80%, accounting for 97.28% of revenue. The year-on-year decline was mainly due to: 1) focusing on key competitive games and 2023H1 further suspending non-key games; 2) “Subway Parkour” showed excellent performance in all operating data in 2023, with a high base. 2024H1 runoff naturally recedes. On the cost side, 2024H1's sales/management/R&D/finance expense ratios were 9.20%, 5.96%, 18.14%, 5.88%, yoy-1.08pct, +2.13pct, +5.51pct, and -3.99pct, respectively. Among them, the decrease in the sales expense ratio mainly benefited from the company's continuous improvement in customer acquisition efficiency and refined operations. The decrease in the financial expense ratio was mainly due to the reduction in the size of the company's debt. The increase in the R&D expense ratio was mainly due to the reduction in the size of the self-developed game “Carapicchu” Increased investment in R&D.

The revenue side will decline due to the streamlining of operating games, etc., and investment in R&D on the cost side will be rigid, putting pressure on the company's profit side. Looking ahead to the future, continuing to focus on the company's performance in research and new games will bring about a recovery on the revenue side, which in turn will drive profit release. On a month-on-month basis, 2024H1's revenue increased by 5% compared to 2023H2, and the company's profit during the adjusted period changed from -0.06 billion yuan to 3.3 million yuan.

Long-life cycle products solidify the basic market, and we expect “Cabi” and others to unleash performance elasticity. 1) Long-term products: The number of “Dream Garden” and “Dream Home” users is growing steadily. Among them, “Dream Garden” 2024H1's revenue increased 14% year over year; the “Mecha Team” national service version, which was newly launched in January 2024, showed excellent sales performance and is expected to become another long-term product operated by the company as an agent. We are optimistic that the company will drive a steady increase in stock product flow through refined operations. 2) New Tour: “Carapicchu” PC China Service increased DAU by nearly 40% during the summer vacation, and the average daily online time was about 120 minutes. In July 2024, the number of paying users and ARPPU increased by more than 30% and nearly 40% month-on-month. The company plans to launch the “Cabi” PC version overseas in 2024Q4, and the mobile version will be launched in 2025Q1. We expect the multi-terminal global release of “Cabi” to release results. In addition, the cross-platform tactical shooter “Operation Delta” jointly developed by the company and Tencent is scheduled to be launched in September 2024.

Profit forecast and investment rating: Considering that the release pace of “Cabi” was slightly slower than we expected, we lowered the 2024-2026 EPS to -0.02/0.28/0.33 yuan (previously 0.15/0.32/0.38 yuan), corresponding to the current stock price of 2025-2026, 7/6 times PE. We are optimistic that the company's stock of products is stable. New games are expected to release profit flexibility. At the same time, the forward-looking layout of AI+ communities and AI+ game development is expected to open up room for long-term growth and maintain a “buy” rating.

Risk warning: New game performance falls short of expectations, industry competition intensifies, industry regulatory risks