Overview of events

On August 14, Dream World issued a positive profit forecast that the net profit for the first half of 2023 is expected to be about 35 million yuan to 55 million yuan (RMB, the same below), compared with a net loss of 222 million yuan for the same period in 2022. The adjusted net profit for the first half of 2023 is about 195 million yuan to 215 million yuan, compared with an adjusted net loss of 51 million yuan for the same period in 2022.

Analysis and judgment

The company's net profit and adjusted net profit are both turned from loss to profit, mainly due to: 1) continuous and in-depth user operation on the Fanbook platform, resulting in an increase in revenue from its own channels and an increase in gross profit margin; 2) improvement in customer acquisition efficiency and fine operation, resulting in a substantial reduction in marketing expenses; 3) taking the initiative to reduce costs and efficiency, resulting in a decrease in general and administrative expenses 4) IP derivatives business is split to reduce the impact of operating losses on profits. In addition, the company expects that the net cash flow from operating activities in the first half of 2023 will be about 230 million yuan to 250 million yuan, an increase of 9326.2% to 10145.9% compared with the same period in 2022 (2.44 million yuan). The company has a sound cash hematopoietic capacity.

Long-term operating games to maintain strong development, self-developed games gradually high-quality delivery. The ARPG mobile game "Glory all-Star" has maintained a good income curve for two years since its launch, and plans to lay out the global distribution strategy; Ghibli-style fantasy adventure RPG "two countries"

It has won the version number and is expected to be launched this year; the two-dimensional TPS shooting game "Karabichu" PC will not be deleted for public testing on August 3, and there will be plans for mobile games and global distribution in the future. Among them, "Karabicu" initially attracted wide attention in the circle with its rare positioning of "two dimensions + TPS" and "paper man". It experienced two tests during research and development, and maintained a rating of more than 8.5 points on Haoyou Kuaibang, TapTap and Bilibili Inc.. Only 4 hours after the launch of the game, Bilibili Inc. players have created more than 10 pages of content, which has been on the popular search list of Station B. in less than half a day, the total number of live broadcasts between Bilibili Inc. and DouYu International Holdings Limited has exceeded 3000, ranking high in the Top2 of HUYA Inc. 's game hot search list. We believe that the super popularity of the first day of the game and the creative enthusiasm of the players have once again confirmed that Chuangmeng has successfully found a suitable position in the highly competitive two-dimensional game market through the innovation of play and the control of user demand. "Karabichu" has the potential to become a head game and is expected to create a high performance elasticity for the company in the shooting track.

The company has created a community user management tool, Fanbook, and self-research and agent games are expected to achieve faster-than-expected growth with the help of Fanbook. At present, the three cores of Fanbook are: 1) join hands with users to do R & D, increase the feasibility of R & D direction, and cultivate early core users; 2) Community word-of-mouth to promote growth, through the community integrated talent live broadcast, short videos, graphic works and other strong interactive forms to show the characteristics of game products to a greater extent, focusing on improving the spread of product word-of-mouth among the user group, and then reducing the cost of getting customers. 3) by embedding AI to improve efficiency, the game studio can more easily grasp the trend of public opinion, locate product problems more quickly, and make product iterative upgrades more accurately. We believe that at a time when the cost of new user traffic is constantly rising, Chuangmeng seeks new growth points on user retention and LTV, Fanbook direct targeting of China's Discord,To Community is expected to open the space for private domain traffic realization, and the platform to support the operation and growth of 10 million-level users shows its strong social fission ability, and has formed a development path of "driving product growth by user community".

Investment suggestion

The company's agent games contribute to stable cash flow, while self-developed games are expected to open performance space, and have a scarce private fan circle operation platform Fanbook, with high performance flexibility and platform scarcity. We expect the company to achieve net profit of 201 million yuan (yoy+108.1%), 317 million yuan (yoy+57.4%) and 401 million yuan (yoy+26.6%) from 2023 to 2025, respectively, and the corresponding EPS is 0.13,0.20,0.25yuan respectively. The current share price corresponds to 22 times, 14 times and 11 times the valuation, maintaining the "buy" rating.

Risk hint

The risk of stricter regulation in the industry, the risk of intensified competition in the industry, the lower-than-expected risk of issuing version numbers, the lower-than-expected risk of running water, and the lower-than-expected risk of new business development.