2023H1 turned a loss into a profit year on year, optimistic about the launch performance of the new game, maintained that 2023H1, the “buy” rating company, achieved revenue of 1,122 million yuan (-18.8% year on year), achieved net profit of 41 million yuan (turning loss into profit, 2022H1 lost 222 million yuan), adjusted net profit was 220 million yuan (turning loss into profit year on year, 2022H1 loss 51 million yuan). Net profit and adjusted net profit both turned loss into profit year on year, mainly due to:

(1) The company's user operations using Fanbook continue to deepen, its own channel revenue has increased, and gross margin has increased; (2) the company has continuously improved customer acquisition efficiency and refined operations, and marketing expenses have dropped dramatically; (3) cost reduction and efficiency measures have reduced management expenses and operating costs; (4) the split of the IP derivatives business has reduced the impact on operating losses. We maintain our profit forecast for 2023-2025. We expect the company's net profit to be 2.50/5.29/702 million yuan respectively for 2023-2025, corresponding EPS of 0.2/0.3/0.4 yuan, and the current stock price corresponding to PE of 19.2/9.1/6.8 times, respectively. We are optimistic about the launch performance of the company's new games and maintain the “buy” rating.

The spin-off of the IP derivatives business has led to a significant improvement in operating cash flow, cost control has improved profitability. The company's net operating cash flow in 2023H1 was 246 million yuan (244 million yuan increase over the previous year). The company's cash flow from operating activities improved drastically, or due to the company spin-off the IP derivatives business, which reduced cash outflows. At the same time, the company's game products performed steadily and contributed stable cash flow. Following the launch of new games, the company's operating cash flow is expected to continue to improve. The company's 2023H1 sales expense ratio is 10.26% (year-on-year -20.59pct), management expense ratio is 3.84% (year-over-year -3.98 pct), R&D expense ratio is 12.67% (year-on-year -0.66pct). The sharp drop in sales expense rates and the drop in management expense rates brought about by cost reduction and efficiency measures have driven the company's performance to turn losses into profits. We judge that with the launch of subsequent new games, short-term cost rates may fluctuate. However, the performance of the company's old games has been steady, and new products or contributions have increased significantly, driving the company's long-term profitability.

The self-developed game layout is about to enter a redemption period. The launch of the new game is expected to drive the company's performance growth. The company's self-developed game “Carapiccio” received one million new users in the “Wave” and “Super Strings” tests. The average daily online time, retention rate, etc. data exceeded expectations. Currently, the PC version was launched on August 3, and the mobile game version may be launched later at home and abroad. “Ni no Kuni: Interlaced Worlds” was jointly developed by the company and Tencent. The degree of completion is already high. It is expected to be paid in 2023Q3. “Operation Delta” received a version number in July 2023 and was jointly developed by the company and Tencent. The successive launch of self-developed games is expected to drive the company's gross margin increase and performance recovery.

Risk warning: New game launch performance falls short of expectations, fee rate control falls short of expectations, etc.