Incidents:

The company released its 2024 three-quarter report. In the third quarter, it achieved operating income of 0.859 billion yuan, a year-on-year decrease of 10.36%; realized net profit due to mother of 0.14 billion yuan, a year-on-year decrease of 23.82%; realized net profit deducted from non-mother of 0.151 billion yuan, a year-on-year decrease of 15.33%; and achieved a net operating cash flow of 0.233 billion yuan, an increase of 4.41% year on year.

The company announced a profit distribution plan for the 3rd quarter of '24. It plans to distribute a cash dividend of 20 yuan for every 10 shares. After deducting 284,800 shares in the company's special account, it plans to distribute a total cash dividend of 0.144 billion yuan; plus 0.322 billion yuan of interim dividends, for a total of 0.466 billion yuan, with a dividend payment rate of 70.94%.

Comment:

The flow of major domestic games has declined, and there has been a sharp increase overseas. From January to September, “Ask for Mobile Games” achieved turnover of 0.881 billion yuan, an increase of 7.71% over the previous year. “Enquiry Mobile Game” achieved sales of 1.612 billion yuan, a year-on-year decrease of 14.13%; “Easy Thinking (Mainland Edition)” achieved sales of 0.479 billion yuan, a year-on-year decrease of 46.4%. “Super Evolution Story 2” and “Pikatang: The Origin of Dreams”, launched in December 2023, contributed incremental revenue and profit from January to September of this year compared to the same period last year. From January to September this year, the company's total overseas revenue was 0.369 billion yuan, an increase of 99.57% over the same period last year. From January to September of this year, products such as “Fly Dragon Knight (Overseas Edition)”, “Monster Never Cry (Overseas Edition)”, and “Outpost: Infinity Siege (Steam International Edition)” were launched. As of September 30, 2024, the company's unamortized balance of recharges and items totaled 0.474 billion yuan, an increase of 0.034 billion yuan over 0.441 billion yuan at the end of the previous year, mainly due to the launch of “Immortal Family”, “Fly Dragon Knight (Overseas Edition)”, “Monster Cry Never (Overseas Edition)”, “One Piece: Dream Guide”, “The Strongest Ship King (Overseas Edition)”, etc., confirmed based on item consumption progress or expected lifespan of paying players The corresponding deferred balance of revenue. Due to the impact of the RMB to US dollar exchange rate, exchange profit and loss income decreased by 63.2386 million yuan year-on-year in the first three quarters.

Product reserves are abundant or new volume is being added. In terms of self-developed products: “Asking Sword Eternal Life” has obtained a version number and will be distributed in mainland China, Hong Kong, Macau, Taiwan, and Southeast Asia; the magic placement product “The Legend of the Sword” will be released in mainland China, Hong Kong, Macao, Taiwan, Japan and South Korea in the first half of 2025; the strategy tower defense game “The Strongest Castle” has obtained a version number and distributed globally; and the Western Fantasy Placement “Code M11” is scheduled to be distributed globally. “One Hundred Million Light Years” and “Echo of Visions” have all obtained edition numbers.

Focus on cultivating R&D talents and expand the team against the trend. The size of the company's R&D team is expanding year by year. The number of R&D personnel reported at the end of 2022, the end of 2023 and 24 was 692, 855, and 871, respectively, accounting for 55.18%, 59.09%, and 59.54% of the total number of employees, respectively. The number of employees at the end of the third quarter was 1,504, an increase of 57 over the end of the previous year, mainly due to an increase in R&D business personnel. The average number of employees per month from January to September this year was about 1,507, an increase of about 149 over the same period last year (an increase of about 10.97%). Among them, the number of R&D personnel increased by about 116, and the number of overseas operations personnel increased by about 30.

Maintain a “Highly Recommended” investment rating. The company's 24Q3 main game flow declined, and there are many reserve products, which are expected to contribute additional revenue in the future. Taking into account our 24-year profit forecast, the company's 24-26 revenue is expected to be 3.683/4.051/4.512 billion yuan, respectively, with year-on-year growth rates of -12%/10%/11%, respectively; net profit to mother was 0.874/1.048/1.142 billion yuan, respectively, with year-on-year growth rates of -22%/20%/9%, corresponding to current stock price-earnings ratios, respectively 17.4/14.5/13.3 times, maintaining a “Highly Recommended” investment rating.

Risk warning: New game launches fall short of expectations, risks of release falling short of expectations, rising purchase costs, lower R&D progress than expected, etc.