Key points of investment:

24 Revenue remained high in the first half of the year, and mini-games were the core driver. According to financial reports, the company achieved revenue of 9.23 billion in the first half of the year, an increase of 19% over the previous year, and realized net profit of 1.26 billion yuan to mother, an increase of 3% over the previous year. Revenue, as a forward-looking indicator, has maintained an upward trend over the past year, and mini-games are the core driving force. Looking at Q2 alone, Q2 achieved revenue of 4.48 billion, an increase of 12% over the previous year. Although revenue declined somewhat month-on-month, it was still high. We expect Q2 games to maintain a high monthly turnover level; Q2, an old product in domestic mobile games and overseas mobile games, will decline steadily and slightly. According to the interim report, overseas game 1H24 achieved revenue of 2.9 billion yuan (yoy -4%), and the overseas share is still over 30%.

Q2 The decline in sales expenses was partially offset by a decrease in gross margin, and cash flow was impressive. According to financial reports, the company's Q2 sales expense ratio was 55%, down nearly 6 pcts from the past two quarters; however, gross margin fell 4 pcts month-on-month due to the increase in agency product revenue.

Cash flow is still impressive. Net operating cash flow in Q2 reached 0.96 billion in a single quarter, totaling 2.13 billion in the first half of the year.

Domestic attention is paid to the release of profits from mini-games, and overseas attention is being paid to two key products climbing. The year 25 was a big year of self-development. The revenue scale of mini-games is large. Even if ROI declines, there is still potential for profit release; “Primal Conquest” and “Mecha Domination”, which were launched overseas in April, are steadily climbing and are expected to become important growth points in the future; the second half of the year was mainly proxy reserves. The simulated management “Time Grocery Store”, which launched in August, is ranked 30-40 on the iOS bestseller list. Q4 focuses on the “Son-in-law” mobile game and “Code Name Battle Song M”. Products developed in-house for 25 years include “Doulo Continent:

“Soul Hunting World”, “Code Name MLK”, “Code Name Masaki”, etc.

The dividend ratio for the first half of the year was 73%, and the dividend ratio was outstanding. The company's dividend was 1.81 billion in '23, with a dividend ratio of 68%; the company was the first A-share listed company to announce continuous quarterly dividends since the release of the “National 9 Rules”. The total dividend for the first half of 24 was 0.92 billion, with a dividend ratio of 73%. If calculated using the 23 billion dividend amount, the current dividend rate is 6.0%.

Adjust profit forecasts to maintain a “buy” rating. Due to the slow pace of profit release from mini-games, based on our judgment on the flow and profit margin trends of old products, and the new product situation, we adjusted the profit forecast and estimated the company's 24-25 revenue of 18.7/21.5 billion (the original forecast was 20.2/21.7 billion for 24-25), increasing the 26-year forecast of 22.3 billion; the net profit for 24-25 was 2.7/3.13 billion yuan (the original forecast was 3.88/4.21 billion for 24-25) billion), adding the 26-year forecast of 3.59 billion, and the current price corresponding to 24-26 PE is 11/10/8x. The company's 24-year revenue growth trend is good, profit release is expected, and the current valuation is at the bottom, maintaining a “buy” rating.

Risk warning: risk of marginal changes in industry regulatory policies, risk of game project delaying/falling short of expectations, risk of asset impairment.