Profit growth in the first half of the year was faster than revenue growth, and small games took over growth as old products stabilized. According to financial reports, the company's 1H24 achieved revenue of 1.43 billion yuan, down 1.1% year on year; net profit to mother was 0.72 billion, up 8.2% year on year; after deducting non-net profit of 0.88 billion yuan, up 27.9% year on year. According to point data and financial reports, the core product “Original Journey” Q2 was stable month-on-month, but it naturally declined from last year's high base (launched at the end of March 23). This is also the reason for the year-on-year weakness of the Q2 company's revenue side. However, Q2 revenue from a month-on-month perspective increased by 5% — “The Original Journey” remained steady; since the launch of the mini-game “Journey to the King” in February, sales volume increased for 5 consecutive months, becoming a successful benchmark for heavy MMO games, taking over and supporting the “Journey” IP market.

Furthermore, the trend of significant recovery in the second half of “Ball” 23 continues to this day, bringing growth to the first half of the year. Other than that, “Moonlight Night” and “Space Kill” have also improved their turnover by optimizing payment points.

Expense ratio optimization, contract debt reached a record high. According to financial reports, as “The Original Journey” has entered a mature period, the ROI of the “Journey to the King” game is high, the 1H24 sales rate was reduced by 8.5 pct to 30% year on year, and R&D and management rates did not change much from year to year. As of the mid-year report, the company's contract debt was about 0.5 billion (0.47 billion as of 1Q24 and 0.42 billion in 2Q23), a record high, forming a strong support for the stability of the company's subsequent performance growth.

There is a high degree of certainty that it will expand next year. In July, it will be purchased for a large amount of money, and AI is still actively cashing in. Focus on the launch of the new version of “Original Journey” Q3 in the short term and the subsequent mini-game growth; in the long run, the company completed the release of the project in '23, and entered a new round of project approval in '24. There is strong certainty that the project will expand next year, including “Code Name SLG” led by Mr. Shi, “Code Card” by the Yueyuan team, and the vertical direction led by the new CEO. The company had a large repurchase scale in July, accounting for more than half of the repurchase amount in a single month, or the bottom signal. Furthermore, the company is still actively deploying AI. The AI endgame challenge gameplay was launched in “Space Killing” in August, and the AI layout continues to be realized.

Adjust profit forecasts to maintain a “buy” rating. Due to the slow pace of the company's overall new products, combined with our judgment on old product flow and profit margin trends, we adjusted our profit forecast. We expect the company's 24-25 revenue to be 3.08/3.59 billion (the original forecast was 3.66/4.11 billion for 24-25), increasing the 26-year revenue forecast by 4.15 billion; net profit due to mother of 1.4/1.6 billion (the original forecast was 1.5/1.72 billion for 24-25), and increased the 26-year net profit forecast by 1.78 billion billion, current price is 13/12/10x for 24-26 PE. The company's Journey IP market is stable, and AI is actively cashing in. Currently, PE is at the bottom, maintaining a “buy” rating.

Risk warning: risk of marginal changes in industry regulatory policies, risk of game project delaying/falling short of expectations, risk of asset impairment.