Matters:

Revenue and profit were under pressure, and performance fell slightly short of expectations. The company released 24Q3 financial reports, achieving revenue of 0.86 billion yuan, YOY -10%, QOQ -17%; realized gross profit of 0.76 billion yuan, YOY -9%, QOQ -15%, corresponding GPM 89%, YOY+1.5pct, QoQ+1.7pct; realized net profit to mother of 0.14 billion yuan, YOY -24%, and QOQ -47%; realized net profit of 0.15 billion yuan, YOY -15%, and QOQ -43%. In the first three quarters, the company achieved revenue of 2.8 billion yuan, YOY -15%; realized net profit of 0.66 billion yuan, YOY -23%; realized net profit without deduction of 0.61 billion yuan, YOY -26%.

A large percentage of dividends in a single quarter. The 24Q3 single quarter dividend was 0.144 billion yuan, with a dividend rate of 103%; the cumulative dividend for the first three quarters of 24 was 0.47 billion yuan, with a dividend rate of 71%.

Commentary:

Stock product flows were still under pressure in the third quarter, and fundamentals are expected to recover steadily after subsequent competition slows down.

Looking at the 24Q3 single quarter, “Enquiry” mobile game achieved revenue of 0.225 billion yuan, YOY -11%; “Wendao Mobile Game” achieved sales of 0.457 billion yuan, YOY -13%; and “Easy Thinking (Mainland Edition)” achieved sales of 0.168 billion yuan, or YOY -18%; the latter two are still under some pressure year over year. We think the weakness may reflect a situation where competition for IP products (DNF and Qundao are basically products from the same period) and Xianxia themes (“Seido Daichi” has been at the top of the applet bestseller list for a long time) during the summer season. Looking ahead, we believe that as the strong period of leading products passes, competition is expected to slow down marginally, and the company's basic game stock is expected to further stabilize and recover.

Product reserves are abundant, and two major products, M72/M88, are expected to be launched on 25H1. Follow-up product reserves are abundant. Key products “Asking for Longevity” (M72) and “The Legend of the Sword” (M88) in terms of self-development are all expected to be launched on 25H1, driving the company's fundamentals to recover further. In addition, the company also has a rich product line with some agent products. In addition to “Wangdu Genesis Record”, which was launched in September, and “Fengshen Fantasy World”, which was launched in October, “Echo of Visions” is also scheduled for November, which is expected to contribute incremental revenue in Q4.

Profit forecast and investment advice: We expect the company to achieve revenue of 3.7/4.2/4.6 billion yuan in 2024-2026 (previously estimated at 4.2/4.7/5 billion yuan), YOY -12%/+14%/10%; realized net profit to mother of 0.9/1.04/1.18 billion yuan (the original forecast was 1.06/1.23/1.37 billion yuan), YOY -20%/+16%/+13%, corresponding to the current market value PE 17/15/13x. Considering that the company has stabilized profits, we used the PE method to value it and gave it a 25-year target PE of 18x, corresponding to a target market value of 18.8 billion yuan and a target price of 260.66 yuan. We believe that the basic stock market of the company is expected to gradually stabilize, and that subsequent reserve products are expected to drive improvements and maintain the “recommended” rating.

Risk warning: macroeconomic fluctuations; product launch progress falls short of expectations; industry competition intensifies