Zulong Entertainment (code: 9990.HK) is a leading developer focusing on boutique mobile games. The company, formerly known as Zulong Studio, was founded in 1997. It spans the era of stand-alone computers, mobile games, web games and mobile games, and has a history of development for more than 20 years. The company's traditional dominant category is MMORPG. Representative products include the phenomenal games “Perfect World,” “Dream Immortals,” and “Dragon Clan Fantasy.” At the same time, the product line has further expanded to categories such as SLG, women, and cards. By the end of 2022, the company has launched 19 boutique mobile games in more than 170 regional markets, supports 14 languages, and operates 13 games with a cumulative total of more than 140 million registered users worldwide.
The company's core barriers: Hard-core R&D is the undertone, popular products are stable, and distribution capacity is constantly improving.
Hard-core R&D: 1) On the team side, the company's management team has strong technical skills and is continuously expanding its core production and planning talents. The team covers the regions with the most developed games in China and has gradually expanded overseas. The proportion of R&D personnel is far higher than the average in the same industry. 2) In terms of organizational structure, the company has formed an efficient industrialization process that closely cooperates with strong Chinese and Taiwan departments such as engines, programs, art, and animation, various project teams, Beijing headquarters and R&D bases, and the company's internal forces and music and art outsourcing partners.
At the same time, more detailed division of functions and restructuring of R&D processes are conducive to feeding back the industrialization development of subsequent projects. 3) The company has industry-leading R&D capabilities using Unreal Engine. It is one of the first developers in China to introduce UE4 into game development, and has launched a series of excellent products driven by UE4.
Based on the significant success of the UE4 collaboration, Zulong Entertainment also became one of the first manufacturers to research and use UE5 and expand its application to multiple game products. 4) The company attaches importance to art team building and recruits a large number of professionals. The art and animation center is huge, and the art production for various games is excellent, reaching the top level in the industry.
The production rate of popular products is stable, and the operation experience is rich. Currently, the difficulty of breaking through in new games is increasing, and slight innovation in gameplay and art improvement are highly definitive driving directions. The company is based on the dominant category of MMORPG, expands new tracks through minimal innovation in gameplay, and promotes the organic integration of other mainstream game categories with MMORPGs. Related products include the “MMO+ Card” game “Noah's Heart” and the “MMO+ Shooter” “Avatar: Return to Pandora” (reserve project). The company has an average of 1-2 years to launch a popular product, and its core game products have a long life cycle, continue to contribute revenue, and have long-term operation capabilities.
Distribution side: Cooperation with Tencent is stable, and independent distribution capabilities continue to improve. Tencent has deep distribution resources and capabilities, and is one of the major shareholders of the company. The company has maintained a sustainable strategic partnership with Tencent for a long time, and many popular games are distributed exclusively by Tencent. Based on excellent product quality, Zulong Entertainment gradually used overseas markets as a starting point, explored the construction of self-distribution capabilities, gradually established a self-distribution methodology, and successfully distributed multiple games in Europe, America, Japan, South Korea, some Southeast Asian countries, and various overseas regions such as China, Hong Kong, Macao, Taiwan, etc. In March 2023, the company's self-issued “In a Shining Name” was launched in mainland China. The performance was outstanding, and the company's self-distribution system construction entered a new stage.
Growth points: Product line reserves are sufficient, and global positioning enhances product value tension.
The company reserves a variety of game portfolios and expects to launch 10 MMORPGs, SLG, women-oriented, shooters, strategy cards, and other types of game products around the world between 2023 and 2025. We believe that as the company's product types expand from MMORPG and SLG to more diverse categories and styles such as women-oriented, shooter, and strategy cards, and the continuous improvement of the integrated R&D and operation model, the life cycle of the company's core products may be further extended, and it is expected that it will steadily and continue to contribute revenue.
Global vision to enhance product value tension. The company presupposes that it can be distributed globally. Through continuous export of high-quality products in different racetracks over the years, and accumulating experience in game operations and user feedback in various countries and markets, the company has developed a deep understanding of players in different regional markets. At the same time, the company is deeply involved in integrated R&D and operation strategies overseas, which is more conducive to the long-term operation of games, and the share of overseas business revenue has steadily increased.
AIGC empowers the entire gaming industry chain, and the company is expected to take the lead in benefiting. AIGC empowers the entire gaming industry chain to reduce industry costs and improve content quality and user experience. The company has always maintained a relatively open attitude and determination to invest in new technologies, and has a mature methodology for building teams and workflows, and is expected to be the first to benefit from technological upgrades.
Profit forecast and investment rating: We expect the company's operating income in 2023-2025 to be 13.1/18.1/211 billion yuan, a year-on-year growth rate of 124.3%/38.4%/16.5%, and net profit for the mother to be 0.42/3.32/478 million yuan, year-on-year growth rate -/ 688.2%/44.2%. We expect the company's EPS in 2023-2025 to be 0.05/0.41/0.59 per share, corresponding PE of 47/6/4 times. We are optimistic about the company's game development barriers and ability to launch premium games, and the increasing monetization value of game products in the context of increasing self-distribution capabilities and technological progress. For the first time, we covered it and gave it a “buy” rating.
Risk warning: Game development progress falls short of expectations; industry policies are becoming stricter; new product turnover performance falls short of expectations; macroeconomic recovery falls short of expectations.