Key points of investment

Incident: On September 2, the company released a bimonthly report summarizing the results for the first half of 2024 and recent operations. In terms of performance, 24H1 revenue reached RMB 2.27 billion, yoy +65.3% (previously forecast was 22.5-2.3 billion yuan). Net profit to mother was 0.22 billion yuan (previously forecast was 2.1 to 0.24 billion yuan), yoy +21.3%. Adjusted EBITDA was 0.45 billion yuan, yoy +29.2% (previously forecast was 4.3-0.46 billion yuan). The results are basically at the center of previous forecasts. As of the end of June 2024, the company's cash and cash equivalents reached $1.49 billion ($0.77 billion at the end of June 2023). In addition, from July to August this year, the company held a number of events around the world, such as the SUGO 3rd anniversary celebration, Mico and YoHo mid-year GALA, and TopTop brand events to deepen user community participation.

Both social and innovative businesses have achieved rapid growth, and latecomer products have achieved outstanding performance. (1) In terms of social networking business, 24H1 revenue increased 66.5% year over year to 2.07 billion yuan, continuing to boost the Middle East and North Africa market, clarifying the social product matrix for the general audience, and increasing gross margin by 1.7 pct to 49.5% year over year. The four products MICO, YoHo, SUGO, and TopTop all entered Sensor Tower's “Top 10 Middle East Social App Revenue Ranking for January-May 2024" list. Latecomer products grew rapidly. SUGO's revenue increased by more than 250% year on year, and monthly turnover exceeded 10 million US dollars; TopTop's revenue increased by more than 100% year over year, and was officially recommended by the Apple App Store in May. HeeSay, a social networking platform for diverse groups, has been hosting offline events in many regions, with a 25% year-on-year increase in traffic. (2) Revenue from the innovative business 24H1 increased 53.7% year on year to 0.2 billion yuan. The second growth curve was further evident. The gross margin decreased by 28.2 pct to 57.9% year over year, mainly due to active investment in expanding social e-commerce business, and increased inventory costs and employee welfare expenses. The total sales volume of major 24H1 boutique games increased 393% year over year to 0.387 billion yuan. “Alice's Dream: Merge Island” entered Sensor Tower's top 30 overseas mobile game revenue list in May and June; “Taylor's Secret” also began to create more commercial value.

The acquisition of minority shares in NBT is expected to increase net profit for future years. Akazicheng Technology announced on June 27 to sign share purchase agreements with BGFG, JJQJ and JZT (seller) and target company NBTSocial Networking. According to the agreement, the target company will issue 10 million shares to JJQJ, and Chizicheng Technology will acquire 77.83 million sales shares held by the seller at a total cost of approximately HK$1.98 billion, including cash costs and shares at issue costs. After the transaction is completed, the target company will become a wholly-owned subsidiary of Chizicheng Technology, and its financial results will be incorporated into the Group's consolidated financial statements. NBT is the overseas counterpart of Beijing Mike after the restructuring. It focuses on providing online social entertainment services, and has launched various products such as Mico and Yoho.

NBT's net profit before tax during the three reporting periods 2022/2023/2024Q1 was 0.44/0.67/0.17 billion yuan, respectively, and net profit after tax was 0.44/0.66/0.17 billion yuan, respectively.

Profit forecast and investment rating: Due to the acquisition of minority shares in NBT or certain fees, we lowered our 2024 net profit forecast from 0.45 billion yuan to 0.35 billion yuan; after the acquisition is completed, the share of minority shareholders will decrease, so we raised the company's 2025-2026 net profit from 0.52/0.6 billion yuan to 0.7/0.8 billion yuan. The current stock price is 8/4/4 times PE for 2024-2026, respectively. We are optimistic about the company's product matrix development strategy and the growth potential of latecomer products, and maintain a “buy” rating.

Risk warning: overseas business risk, overseas policy risk, exchange rate fluctuation risk.