In the first half of the year, the company further focused on key boutique games and effectively implemented cost reduction and efficiency, turning losses into profits. With the gradual launch of the company's self-developed products in the second half of the year, we expect the revenue of the company's core game products to increase further, maintaining a “buy” rating and target price of HK$3.7.

Significant cost reductions and efficiency gains have been achieved, turning losses into profits. Due to the company's further focus on key boutique games, the company's 1H23 revenue fell 18.8% year over year to RMB 1.12 billion; gross margin increased 2.3 percentage points year over year to 45.1%, mainly because Fanbook drove channel cost reduction. Thanks to the effective implementation of the company's cost reduction and efficiency measures, operating expenses were greatly optimized. Sales expenses fell 73% year on year, management expenses fell 51%, and R&D expenses fell 23%, driving the company's operating profit margin to 13.7%; adjusted net profit was 200 million yuan, and the adjusted net interest rate was 18.0%, turning losses into profits, turning losses of 50 million yuan in the same period last year.

The core game remains steady, and new games are expected to be an important growth driver in the future. The company's core game products, such as “Honor All Stars”, “Subway Parkour”, and “Dream Garden”, have maintained a steady growth trend under the company's refined operation. The company plans to launch two new self-developed tours in the second half of the year: “Carapicchu” received one million additions in the recent public beta. Data such as daily online time and retention exceeded the company's expectations, and is expected to become an important product for the company; “Two Countries: Interlaced Worlds”, which was jointly developed by the company and Tencent, is expected to be tested for a fee in the third quarter. Furthermore, “Operation Delta”, which was jointly developed by the company and Tencent, obtained a version number in July of this year and will be launched at an optional date.

The company's early investment in self-research has gradually entered the harvest period, and various products will gradually be launched, which is expected to become an important growth driver for the company in the future.

Maintain the “buy” rating and target price of HK$3.7. Considering the company's further contraction of non-core business, we lowered 2023E/2024E revenue to RMB 2.48 billion/2.93 billion yuan. The company's various new tours are expected to drive future revenue growth, maintain a “buy” rating and target price of HK$3.7, corresponding to 2023E/2024E 14x/10x P/E.

Investment risk: New tourism performance falls short of expectations; profit improvement falls short of expectations.