Core views

Shenzhou Taiyue was founded in 2001 and initially mainly engaged in ICT business. In 2013, the company wholly acquired SLG game developer Shell Games, and the game business developed in parallel with the computer business. The game business has benefited from the long-term operation of the overseas products “Age of Origins” and “War and Order”. The game business accounted for more than 60% of revenue in the past 3 years, and the 4Q24 welcome product cycle; the computer business is based on ICT operation and maintenance, and AI business and cloud services have flourished, and losses have continued to decrease in the past 3 years. The company's performance growth rate was high, with revenue CAGR over 35% and profit CAGR over 60% in 19-23.

1. Behind the success of Shell Games: Development is “steady and relentless”. The development style of operating and updating high-frequency Shell Games is “steady and relentless”. Although the number of products in operation is small, every game that has been in operation for more than 3 years has the ability to continue to grow. Taking “City of the Rising Sun” as an example, the turnover in the 5th year after launch still increased by 30%. Judging from the causes of growth, “rising volume and price” together drive growth. In 2023, “City of the Rising Sun” saw a 30% increase, and MPU and ARPPU continued to grow by 6% and 23%.

1) R&D side: SLG has strong R&D capabilities and high subject sensitivity. The SLG mobile game mechanism is complex, and the requirements for numerical systems and image performance are high. Shell has accumulated SLG research and development experience long ago. In terms of theme gameplay, “War and Order” used SLG+'s low-threshold real-time strategy in '16, and “Age of Origins” chose the currently popular zombie theme in '18.

2) Operation side: High frequency, high quality updates, higher operating intensity than similar products. “Warand Order” remained updated about 50 times a year in 22-23, and the “Age of Forigins” version was updated more than 40 times a year in 22-23. The high density of updates keeps the game fresh and playable.

2. New game reserves are in hand, and novel themes are expected to once again lead the SLG trend. Code DL and Code LOA have successful cases to follow in the development idea of integrating game themes and gameplay. Facing “SLG+” and the blue ocean of theme innovation, the company is expected to expand the player base, reduce customer acquisition costs, and further seize the SLG market through integrated gameplay.

Investment advice: Compared with domestic mobile game competition, the overseas SLG market has more space and opportunities. The company's old games “City of the Rising Sun” and “War and Order” are stable, and with the gradual narrowing of the “City of the Rising Sun” marketing campaign (marketing expenses accounted for 33% of revenue in 23 years), there is still a large wave of room for profit release. Shell's development style is “steady and relentless”. Although the number of products in operation is small, every game that has been in operation for more than 3 years has long-term explosive power. “Code DL” and “Code LOA” to be launched in 4Q24 are core development projects selected by the company in recent years. They are optimistic about the scarce themes of the two games and their strong development and operation capabilities, driving the company's profit level to the next level.

We expect the company's revenue for 2024-2026 to be 69.4, 82.1, and 9.04 billion yuan, up 16.5%, 18.3% and 10.1% year on year; net profit to mother will be 11.1, 12.6, and 1.43 billion yuan, up 25.0%, 13.7% and 13.4% year on year. The latest closing price corresponds to PE of 14.8x, 13.1x and 11.5x, which is currently actively recommended.