Full-year revenue is in line with expectations: Chizicheng Technology released its annual results in 2020, and the company's revenue increased by 203% to 1.18 billion yuan from the same period last year, in line with our expectations. The annual gross profit margin reached 63.7%, down 3.4ppts from the same period last year, mainly due to the increase in the proportion of value-added services with relatively low gross profit margin, which was partly offset by the company's reduction of advertising platform business with lower gross profit margin. The net profit attributed to the parent company in 2020 was 39.69 million yuan, down 42% from the same period last year. According to the company's performance meeting, it is mainly due to the impact of non-operating factors, including equity incentives and investment in games and social products. The impact of this non-operating factor is expected to reduce year by year in the future. The adjusted net profit for the whole year increased 41% to 150 million yuan compared with the same period last year, corresponding to the adjusted net interest rate of 13.1%, which was better than we expected.

Social business takes root in emerging markets and expands its territory in the global market: the company's social business mainly depends on the internal purchase-based value-added service model. In 2020, the company's value-added service revenue reached 660 million yuan, accounting for 56% of the revenue, which is mainly driven by the revenue contribution of the blockbuster open social application Mico. In 2020, the company downloaded 183 million social products, and the average number of monthly active users reached 11.36 million. In addition, user stickiness and duration of use also maintained steady growth. The company's social products have gained competitive advantage in emerging markets such as the Middle East and Southeast Asia, and some breakthroughs have been made in mature markets. According to App Annie,2020, Mico has repeatedly entered the best-selling list of iOS and GooglePlay social applications in the United States. In addition, Mico is also actively exploring the Japanese, Korean and European markets to further improve the global layout. In addition to Mico, the company's other social products, Yiyo and YoHo, respectively focus on video chat and voice room group chat, forming a differentiated product matrix. Nine months after its launch in 2020, Yiyo has been downloaded more than 50 million globally. At present, the main markets are India, Pakistan and Middle East countries. In the future, efforts will be made to expand other global markets while strengthening the basic market. Looking ahead to 2021, we expect that as the company's social business further expands the global market, increases user coverage based on differentiated product matrix, and overlays the localization strategy, the social business's share of revenue is expected to further expand, and Mico is expected to remain the main driver of revenue growth in social products, but given the strong growth of other products such as Yiyo, the composition of revenue from different products in the social business may be more balanced.

The game business "self-research + issuance + investment" blossoms to explore multiple cash models: the company's game business is based on light to moderate categories and currently mainly relies on flow realization. involved in the game category, including leisure intelligence, sports, puzzles and synthesis category, mainly for North America and other developed countries. In 2020, the company's realized traffic income was + 39% to 520 million yuan compared with the same period last year, accounting for 44% of the revenue ratio.

In the whole year, the company downloaded a total of 152 million game products, with an average of 11.51 million monthly active users. In order to expand the multi-cash model, the company has also gradually made efforts to lay out medium and heavy game categories and continue to polish the high-quality content. The game business takes "self-research + distribution + investment" as the development strategy. In 2021, the company invested in SLG Game Company Fantasy Dreams. We believe that this move is expected to enhance the company's R & D strength in medium and heavy game categories such as SLG, and further expand the user base. According to the performance call, the company expects that the overall number of monthly active users of social and game products will double in 2021.

Investment advice: maintain a buy-B rating with a target price of HK $6.0, based on a price-to-earnings ratio of 10.8x 2022 (industry average). The company implements a "traffic plus" strategy to drive overseas expansion through social and gaming engines. The social sector has initially built a differentiated product matrix and is expected to continue to benefit from strong demand from users in the Middle East and Southeast Asia; the gaming sector relies on traffic advantages to cut into mild to moderate gaming tracks, and currently focuses on advertising. With the future polishing of boutique content, the business model is expected to gradually diversify. We expect revenue growth of 93% to 53% in 2022, with an adjusted net profit of 370.57 million yuan.

Risk hint: the new game pipeline performance is not as expected, the content and new business investment lower profit margins, advertising growth is lower than expected.