Domestic game leaders that have gone through cycles have accurately grasped industry trends in four rounds of transformation.
Reviewing history, we found that the company has successfully grasped the development opportunities brought about by four industry changes. 1) Refinement of page games: At the beginning of its establishment, it focused on page games, and rapidly rose through a joint operation model; 2) Successfully achieved “page transfer: 37 mobile game distribution platforms and 37 game mobile game R&D brands were established in 2017, and the first self-developed “page to hand” product “Eternal Era” became an industry benchmark. In the same year, the company's mobile game revenue surpassed page game revenue for the first time; 3) Purchase volume distribution in the Super App era: In 2018-2019, the company keenly understood the evolution of traffic from channels to super apps, and continued to advance and refine and Fully build traffic operation capabilities with the “quantum” - “sky machine” system as the core; 4) Diversification and globalization: expand overseas markets and achieve breakthroughs in multiple game categories at the same time. In addition to the game business, it also actively lays out diverse fields such as the metaverse and AIGC to build an ecosystem.
Basic market: Successful transformation of “integrated research and operation”, development in the direction of quality and diversification.
1) The company entered the game industry chain as a publisher. With strong distribution capabilities, the company broke through upstream R&D and formed an integrated R&D and operation system. Currently, there are four major R&D & distribution brands.
At the same time, it has increased investment in R&D resources, actively embraced the application of AI in the game industry, applied decision-making AI and generative AI to various business processes, and gradually created a digital intelligence product matrix that runs through the entire R&D process, including “Zeus,” “Athena,” “Ares,” and “Cupid” on the R&D side, promoting nine major mid-stage products such as “Turing,” “Quantum,” “Tianji,” and “Easy View.” 2) On the product side, the company proposed transformation in 2018 to promote a “dual-core+multi-diversified” diversified product strategy. Traditional ARPG/MMORPG advantage tracks contribute to the basic performance market, and innovative racetracks such as SLG, cards, and simulation have opened up room for performance flexibility and growth. In 2023, the company's “Doulo Continent: Battle of the Spirits Master”, “Puzzles & Survival”, “Call Me the Treasurer”, and “Song of the City on the Cloud” performed excellently; the average monthly operating volume of 8 products in the world exceeded 100 million yuan, and the highest monthly turnover of mobile games distributed by the company worldwide exceeded 2.3 billion yuan.
Future highlights: Games go overseas and mini-games provide new growth momentum.
1) The current situation of domestic companies going overseas is very similar to the situation of Japanese companies before Nintendo went overseas — while the manufacturing industry went overseas, cultural companies also went overseas. Among the various media content sectors, game content going overseas is one of the most successful segments. Strategy (SLG) games have long been the main source of overseas revenue for Chinese game companies. Since 2020, the company has accelerated the overseas expansion of games. Currently, the overseas revenue scale is stable in the first tier of overseas game manufacturers, accounting for 35.1% of overseas game revenue in 2023. “Puzzles & Survival,” “Call Me the Treasurer,” and “Song of the City on the Cloud” have performed steadily. 2) The revenue in the mini game market has maintained rapid growth for three consecutive years, and in 2024, “Minigame Goes Overseas” will become a new force on the overseas circuit. In 2023-2024, many of the company's mini-games performed well domestically and overseas. For example, “Demon Asks” (the overseas version of “Seek Daichi”) had a monthly turnover of 10 million dollars, and since the launch of the Douro IP game “Soul Prologue”, it has continued to show strong potential.
Investment advice:
In history, the company has transformed many times to accurately grasp industry trends, and the scale of revenue and profit has continued to reach a new level. In recent years, the company has been steadily advancing the “boutique, diversification and globalization” strategy, which has been very effective. In the long run, we are optimistic about the company's continued improvement in the field of small games and in the direction of going overseas, which is expected to open up new growth space. We expect the company's net profit for 2024-2026 to be 2.736 billion yuan, 3.199 billion yuan, and 3.461 billion yuan, respectively, and the corresponding EPS will be 1.23 yuan, 1.44 yuan, and 1.56 yuan respectively. We gave the company 14x PE in 2024, with a corresponding target price of 17.22 yuan, covered for the first time, and gave it a “buy-A” rating.
Risk warning: Risks such as missing version numbers, falling short of expectations in developing new products, falling short of expectations in product flow, loss of core talent, and falling short of expectations in assumptions and estimates.