Key points of investment:

Playing cards are growing steadily, and whipped eggs drive growth. As a leader in the Chinese playing card industry, the company has been deeply involved in the industry for a long time: 1) In terms of production, the company is currently the only domestic poker manufacturer that has achieved fully automated production, and has the advantages of industrialization, environmental protection and scale; 2) In terms of quality, the company's product “Yao Ji” playing cards has excellent quality, beautiful patterns, and enjoys a good reputation in domestic and foreign markets. It is one of the six major brands of the “Famous Brands in the Chinese Playing Card Industry” announced to the public by the China Culture, Education and Sporting Goods Association. 3) In terms of channels, the company achieves rapid sales of products through dealers at all levels, and combines the company's mobile internet game business to form healthy mutually oriented development between online and offline customers and broaden sales channels for playing card products. As of 2021, the company's playing card market share reached 25%. After the completion of the 0.6 billion secondary poker production base in Chuzhou, Anhui, the company's production capacity will increase dramatically, and the market share is expected to increase to 32% in 2028. Furthermore, in line with the whipped egg craze, the company launched the “Yao Ji Whipped Egg” brand playing cards, which is expected to further promote the growth of the playing card business with a national 0.14 billion whipped egg player base.

The game business is growing steadily, and the core products remain everlasting. “Fishing at Your Fingertips”, “Fishing Explodes the Sky” and “Yao Ji Fishing 3D Edition” launched by Chengxi Technology, a subsidiary of the company, continues to maintain user appeal and market competitiveness through continuous iterative updates. It has been at the top of the iOS bestseller list for a long time, building the company's strong performance base. The company is actively developing overseas markets. The various Bingo games launched by Big Fish Sports have covered more than 100 countries and regions around the world, and have been recommended globally by Google Play many times, showing high potential for growth. Furthermore, the “Every Day Loves Whipped Eggs” game owned by the company has invested in more than 40 million registered users. It is expected to form online and offline collaborations with the company's whipped egg playing card business to enhance the company's performance.

Coverage of the entire advertising and marketing link may benefit from TikTok's growth. The advertising and marketing business of Luming Technology, a subsidiary of the company, mainly focuses on information flow advertising, and has built an Internet marketing chain covering data analysis, effect marketing, effect optimization, and short video content production to provide online marketing solutions for brand customers. The company cooperates deeply with ByteDance and has qualifications such as “Massive Engine Advertising Agency,” “Giant Engine KOL Procurement Partner,” “Giant Thousand River Service Provider,” and “Huge Gold Certified Service Provider.” In the future, as Byte's overseas traffic grows, the company is expected to share the dividends of TikTok's high overseas advertising revenue growth.

The card layout was advanced in depth to create Yao Ji's “Card World”. In January 2022, the company held 38% of Shanghai Lujiao Enterprise Consulting Management Co., Ltd. through a battle investment, and indirectly held shares in DAKA Culture and Card Hobby. Among them, DAKA Culture is a leading card IP publisher in China. The products it has signed and distributed cover the fields of soccer, basketball, e-sports, film and television, and online variety. Cardao focuses on sports card collection transactions, and is the leading highly specialized second-hand collectible card platform in China. The company is expected to combine DAKA's cultural IP distribution advantages with the advantages of professional card shopping services, continuously expand the boundaries of the card business, and create Yao Ji's “Card World”.

Profit forecast and rating: We expect the company's net profit to be 0.58/0.7/0.8 billion yuan in 2024-2026, with year-on-year growth rates of 3.3%/20.0%/15.3%, respectively, and PE corresponding to the current stock price (December 02, 2024) being 22.5/18.8/16.3 times, respectively. We selected Gbit and Kaiying Network as comparable companies. Given the growth potential of the company's card business, we covered it for the first time and gave it an “gain” rating.

Risk warning. Market competition is increasing risks, the risk of stricter policy regulations, and the risk of new tourism falling short of expectations