Key points of investment
On March 24, the company released its 22-year performance report. The company's 22H2 achieved operating income of 254 million (YOY -30.8%, HoH -23.0%) and a net loss of 452 million under non-GAAP (YoY -137%, HoH -61.5%). Overall, the launch of the product was delayed in '22 and development fell short of expectations, but there are sufficient IP reserves for subsequent games.
There were few new products at the end of the last round of the product cycle. Combined with “Flash” falling short of expectations, the company's 22H2 revenue both declined year-on-year and month-on-month, and the company's 22H2 revenue declined significantly from year to month, mainly due to: 1) the performance of new games already released on 22H1 fell short of expectations and profits fell short of expectations due to delays in products planned to be launched; 2) the flow of stock products fell naturally. Specifically, the company 22H2 achieved revenue of 254 million (YoY -30.8%, HoH -23.0%). Due to the continuous optimization and adjustment of the pace of development of some games, the number of games launched by the company 22H2 was low. The key product “In the Name of Shining” was only released overseas. It achieved good results at the beginning of its release, but there was a problem with the game's lack of momentum. As of March 25, 23, the game did not enter the top 50 App Store bestsellers in most overseas regions, and at the beginning of its launch, due to lack of version numbers, it continued to delay launch in mainland China, which also caused profits to fall short of expectations. Also, some games that have been online for a long time have seen a decline in revenue due to a significant decline in the flow of the normal game life cycle.
Looking ahead, subsequent games have substantial IP reserves and are expected to usher in a recovery in performance. Specifically, “In the Name of Shining” was launched on National Service on March 24. According to Qimai data, as of March 30, App Strore ranked 17 on the bestseller list (game), and the revenue contribution is expected to be reflected in 23H1. In the medium term, due to the company's large investment in R&D costs and rich game reserves in the early stages, the company will usher in a wave of product launch cycles in 23. Among them, the key product is the “Avatar” mobile game, which has gone through many rounds of testing, and is expected to contribute part of the revenue in 23.
The gross margin level declined, and R&D expenses continued to increase to the subsequent development of the 22H2 energy storage company 22H2 operating costs of 74 million (YoY -21.3%, HoH -14.9%), achieving a gross profit margin of 71.3% (YoY -3.13pct, HoH -2.28pct). The company's operating costs declined sharply year-on-year and month-on-month, mainly because commissions and IP shares collected by distribution channel providers and payment channels decreased as revenue declined, while gross margin levels both declined year-on-month and month-on-month. We think it was mainly due to a decrease in the share of development and licensing business compared to the same period. The revenue share of the company's development and licensing business fell from 51.3% in '21 to 40.8% in '22, that is, a decrease in the number of self-developed games launched. The gross margin of development and licensing businesses is usually higher, so overall gross margin falls.
22H2 sales expenses were 164 million yuan (YOY +88.5%, HoH +41.0%), and the expense ratio was 64.6% (YOY+40.9pct, HoH +29.1pct). Sales expenses all rose sharply year over month, mainly due to:
1) Mainly due to an increase in employees' remuneration; 2) a decrease in income in the second half of the year, leading to an increase in share.
The 22H2 management fee is 54 million yuan (YOY +0.00%, HoH +0.00%), and the fee rate is 21.26% (YOY+6.55pct, HoH +4.90pct). The 22H2 company had 256 non-R&D personnel, a decrease of 6.91% over the previous year. The increase in management expenses was determined mainly due to employee optimization resulting in one-time expenses and an increase in the remuneration of surviving personnel.
22H2 R&D expenses were 379 million yuan (YoY +2.71%, HoH +3.27%), and the cost rate was 149% (YOY+48.7pct, HoH +38.0pct). The company's R&D expenses and fees have increased significantly. The reason is similar to management expenses. It is also due to the one-time costs incurred by optimizing employees and increasing the remuneration of surviving personnel. Specifically, the number of R&D personnel in 22H1 company The number of R&D personnel was 925, a decrease of 23.5% over the previous year. The optimization of R&D personnel is greater than that of non-R&D personnel, so a large one-time cost is incurred. At the same time, the remuneration of surviving staff is also increasing. Coupled with a decrease in the scale of revenue, the cost rate has increased dramatically.
Overall, 22H2 on the company's expenses side is painful to a certain extent, but it also shows the company's determination to pay attention to talents. R&D expenses may remain high in the future, but in the context of the company's strong R&D, high R&D expenses support the foundation of the new product line. At the same time, we entered a new product cycle in '23, and it is expected that there will be 3 more products launched, including “Avatar”, “Legend of the Three Kingdoms”, and “Code Name: IM”. The cost rate is also expected to decrease after the revenue scale increases.
Investment advice
We continue to be optimistic about the company's R&D capabilities and monetization capabilities brought by outstanding IPs such as “Avatar” and “The Legend of the Three Kingdoms”. We expect 23-25 revenue of 1,64/2,03/2.35 billion yuan, and non-GAAP profit of 238/372/430 million yuan. Corresponding PE is 17/11/9 times respectively, maintaining the “buy” rating.
Risk warning
The quality or progress of the launch of new games fell short of expectations, macroeconomic decline, damage to game recharges, etc.