Brief performance review

On October 30, the company released its Q3 quarterly report. Q3 revenue was 1.313 billion yuan, -24.36% year over year, net profit to mother was -0.212 billion yuan, YoY -190.27%, net profit not attributable to mother was -0.213 billion yuan, or -223.90% YoY.

Management analysis

Revenue: Gaming, film and television businesses are under pressure. Q3 revenue was -24.36% YoY and -8.25% YoY. 1) Gaming: Revenue for the first three quarters was 3.87 billion/ -27.2%. According to estimates, Q3 revenue was 1.22 billion/ -10.6% month-on-month, mainly due to the fact that few new games were launched in the current period. Old products were affected by the product life cycle, and recharge flow declined. 2) Film and television: Revenue for the first three quarters was 0.17 billion/ -78.4%. According to estimates, Q3 revenue was 0.083 billion/ +50.7% month-on-month. Revenue mainly fluctuated with the number and volume of film and television productions broadcast in the current period.

Profit: Net interest rate declined month-on-month due to falling gross margins+losses of investee companies. 1) Q3 net profit margin -16.1% /month-on-month -5.9pct, deducting non-net interest rate -16.2% /month-on-month -10.8pct. Split costs: gross margin of -11.2pct month-on-month, mainly due to changes in revenue structure and increase in revenue share of products with low gross margin; sales, management, and R&D rates are -5.5, -1.9, and +1.5pct month-on-month respectively. It is expected that there are few new product launches in the current period, and promotion costs are low, but R&D and testing of reserve products are progressing steadily, and large-scale talent sorting has come to an end; Q3 investment income is -0.12 billion yuan, and the loss margin is increasing by 0.0865 billion yuan month-on-month. The main reason is that the game business was invested The company confirmed an investment loss of 0.116 billion yuan. 2) Business division: The Q3 game business deducted non-net profit of -0.095 billion yuan, and the operating performance improved month-on-month after deducting losses of the invested companies; the film and television business deducted non-net profit of -0.087 billion yuan, mainly due to the fact that sales prices of some movies and TV series were lower than expected.

Looking forward to the follow-up: Large-scale personnel sorting is basically over, and we wait for reserve products to be launched. 1) Game: The mobile game “World of Immortals” began a “implementation test” on October 18. It has a good reputation among players and is expected to be launched within the year; “Another Ring” held an offline closed demo event on September 22, which was well received by players, and is now recruiting for the “Singularity Test”. Reserve products such as “Immortals 2,” “Code Name Barbarian,” and “Code Z” are also being actively developed and tested. 2) Film and television: In broadcasts such as “Night Is Intense”, the company will continue to focus on “improving quality and reducing weight” strategies to adapt to market changes and strictly control investment risks in film and TV drama projects.

Profit Forecasts, Valuations, and Ratings

We expect the company's net profit to be -5.3/+7.2/+0.95 billion yuan for 24-26, respectively. The corresponding PE is N/A, 26.8, and 20.2X, maintaining a “buy” rating.

Risk warning

The risk that game and video products will not perform as well as expected when launched; risk that version distribution falls short of expectations; regulatory risks.