FY23 results are basically in line with our expectations
The company announced FY23 results: revenue of 908 million yuan, or 55.5% year-on-year; non-IFRS net loss of 283 million yuan, a year-on-year decrease (loss of 732 million yuan in 2022). Among them: 2H23 achieved revenue of 506 million yuan, an increase of 99%/26% over the same period; achieved a non-IFRS net loss of 67.91 million yuan and a year-on-year loss of 67.91 million yuan (2H22 loss of 460 million yuan/1H23 loss of 215 million yuan). The company's performance generally met our expectations.
Development trends
The main product “In the Name of Shining” was steady, and revenue in the second half of the year nearly doubled year-on-year. “In the Name of Shining” performed well. It landed in mainland China and some overseas regions in the first half of 2023. We estimate that the product contributed more than 50% to the company's total revenue. In terms of the pace of product updates, the product is currently being updated at a rate of 1 5 to 6 star card pool every 3 weeks, and the overall situation remains steady and orderly. Before and after the card pool update, the iOS best-selling list for games in mainland China can rise to less than 30. The company also promoted multi-device/channel product launch on 2H23, launched on PC in September, and launched on Steam and Epic platforms in November. We believe that if the company continues to supply high-quality card pools and operates in an orderly manner, the flow rate is expected to maintain a relatively steady level.
Expense control is effective, and one-time intangible asset impairment provisions affect profits. The company streamlined and optimized the R&D team, focusing on core products. 2H23 R&D expenses fell 25%/5% month-on-month to 283 million yuan, and the R&D expenses rate dropped to 56%. The company also stated that it will control employee benefit expenses and the cost of outsourced technical services. Sales expenses for 2H23 decreased 33% month-on-month to 110 million yuan, and sales rates fell 42/19ppt to 22% month-on-month. In addition, 2H23 also has intangible asset impairment provisions of 22.3 million yuan to increase costs. The company stated that it is mainly due to the fact that some game strategy changes will not be further introduced to account for impairment of related online game licenses, etc.
The pace of new product launches is adjusted carefully and in an orderly manner. All 2024 products are already in the testing phase. The company announced in January of this year that it decided to end the “Avatar: Return to Pandora” launch plan. All other products are progressing steadily, and new products have been proposed. In terms of product reserves, there are 3/3/2 games in stock for 2024-26. Among them, the 2024 Chinese-style RPG game “Project Code: IM” and the strategy card game “Project E” have all completed a new round of testing in January of this year. “Legend of Heroes of the Three Kingdoms” has already been paid for testing in December 2023. We think the overall pace is relatively tight, so we can pay attention to the subsequent product scheduling process.
The 2025 pipeline focuses on “Project Code: Odin” (created by UE5, “Dragon Clan” novel IP).
Profit forecasting and valuation
In view of the uncertainty of the launch of new products and the termination of the “Avatar” launch, the 2024/25 non-IFRS net profit was reduced by 49% and 43% to 45.6 million yuan/107 million yuan. The current share price corresponds to 7.5 times 2025 non-IFRS P/E. Maintaining an outperforming industry rating, due to adjustments in profit forecasts and considering that the company's key products “Odin” and the like will be launched in 2025, the 24-year adjustment period may be switched to corresponding 2025 valuation, and the target price was lowered by 20% to HK$1.60, corresponding 10 times the 2025 non-IFRSP/e, with 33% upward space.
risks
The launch process and performance of the new tour fell short of expectations, purchases exceeded expectations, relationships with third party publishers deteriorated, macroeconomic uncertainty, industry policy risks, and liquidity risks.