Introduction to this report:
The company cooperated deeply with Kuaishou to form traffic synergies, and its Hippo Games enjoyed the market dividends of accelerated monetization of boutique casual games.
Key points of investment:
Maintain an “increase in holdings” rating. As one of ByteDance's largest casual game suppliers, the company is expected to use its outstanding industrial production capacity and data R&D system to continuously replicate new hits and enjoy the market dividends of the explosion in core Second Ring Road traffic. Maintain the 2021-2023 EPS to $4.05/5.59/7.78, maintain the target price of $90.70, and maintain the shareholding increase rating.
Incident: The company released its 2020 annual report and the first quarter 2021 report. In 2020, the company's revenue increased 64.37% year-on-year to 1,416 million yuan. The net profit of Guimo increased 78% year over year to 301 million yuan, and net profit after deducting non-return mother increased 56.65% year over year to 243 million yuan. 2021Q1, the company's revenue increased 120% year-on-year to 516 million yuan. Net profit of Guimo increased 970.31% year on year to 151 million yuan, and net profit after deducting non-return mother increased 1086.18% year on year to 151 million yuan.
Byte and Kuaishou's core two-ring traffic systems have extensive space, and casual games contribute the main content. Against the backdrop of a gradual slowdown in the growth rate of short video users and high ad load rates, ByteDance and Kuaishou have both stepped up their efforts to build core second-ring traffic systems (external advertising networks) to gain more user traffic share. The size of the traffic market in the Second Ring Road is expected to grow from 30 billion in 2020 to 150 billion in 2023. Casual games, free reading, and tools are the main content components, with casual games being the largest category.
The company's ability to industrialize casual games is strong, and new products will continue to be launched in the future. Hippo Games, a subsidiary of the company, is deeply involved in the field of casual games. The product range is rich and iteration is rapid, and there are many hot products. Products such as 2021Q1 “Synthetic Watermelon” and “Slime Simulator” have shown outstanding performance, and new products such as the anagram games “Magical Kanji” and “Master of Numbers” are expected to be promoted and launched in the near future.
Risk warning: Internet advertising expansion falls short of expectations, and new product development and operation falls short of expectations.