The decline in revenue and profit narrowed in the third quarter, and the dividend rate was high. 1) In the first three quarters of 2024, the company's revenue was 2.82 billion yuan, down 14.8% year on year, mainly due to the decline in sales of “Ask Mobile Games” and “Easy Thinking”; net profit to the mother was 0.66 billion yuan, down 23.5% year on year. The company's cash dividend for the first three quarters of 2024 was 0.47 billion yuan (tax included), with a dividend ratio of 70.9%; looking at the third quarter of the single quarter, the company plans to pay a discovery dividend of 0.14 billion yuan (tax included), accounting for 100% of net profit attributable to mother. 2) Looking at the third quarter of a single year, the company's revenue was 0.86 billion yuan, down 10.4% year on year, and the decline narrowed 3.9 percentage points month-on-month; net profit to mother was 0.14 billion yuan, down 23.8% year on year, and the decline narrowed 4.6 percentage points month-on-month.

The gross margin remained at a high level of 89% or more, and the decline in revenue led to an increase in the expense ratio. The company's gross profit margin for the third quarter was 89.0%, up 1.5 percentage points year on year, mainly due to “Super Evolution Story 2” and “Pikatang's Dream Origin”, which was launched in December 2023; the overall cost ratio increased 10.5 percentage points to 63.1%, and the overall cost amount increased 7.5%, of which the sales/management/finance/R&D expenses ratio was 28.9%/10.0%/1.8%/22.4%, respectively.

Overseas business grew nearly 100% year over year, and the agent products “Fengshen Fantasy World”, “Echo of Vision”, and “Wangdu Genesis Record” are expected to contribute to increased performance. 1) In terms of old products, in the first three quarters, “Wendao” mobile game revenue increased by 7.7%, “Wendao Mobile Game” revenue fell by 14.1%, and “One Thought at a Time to Live” fell by 46.4%.

2) In terms of new products, the company will continue to focus on MMORPGs, plug-in categories, and SLG, and reserve self-developed products, including “Asking the Eternal Sword” and “Legend of the Sword Battle”. In addition, the proxy product “Fengshen Fantasy World” has already started public testing, “Echo of Vision” has already started, and “Wangdu Genesis Record” has been launched. 3) Overseas, the company's revenue in the first three quarters of 2024 increased 99.6% year-on-year to 0.37 billion yuan. It mainly released “MonsterNever Cry (European and American version),” “Fly Dragon Rider (Overseas Edition),” and “Outpost: Infinity Siege (Steam International Edition).” In addition, the company has stocked “Legend of the Sword and Sword (code M88),” “Chung Ah, the Primitive,” and “100 Million Light Years”, and many other products that can be distributed overseas.

Risk warning: New product launch progress or turnover falls short of expectations; product competition is fierce; regulatory risks.

Investment advice: Optimistic about the company's R&D capabilities and long-term growth potential, and maintain a “superior to the market” rating.

Due to the rapid decline in the company's core old games and the increase in R&D expenses for introducing R&D personnel, we lowered our profit forecast. Net profit for 24-26 is 0.89/1.04/1.23 billion (originally 1.1/1.28/1.49 billion billion), EPS is 12.35/14.4/17.02 yuan respectively, corresponding PE is 15x/13x/11x; the company has excellent product development and long-term operation capabilities. Future new product growth will drive a new round of product cycles while continuing to gain strength overseas , maintaining an “superior to the market” rating.