Key points of investment:

Results grew rapidly in the first half of the year. The company achieved revenue of 3.05 billion in the first half of the year, up 15.0% year on year; net profit to mother was 0.63 billion yuan, up 56% year on year. Among them, Q2 achieved revenue of 1.56 billion, an increase of 8.5% year over year; net profit to mother of 0.34 billion yuan, an increase of 48.7% year over year.

Q2 Game traffic was steady month-on-month, and profit margins increased dramatically. According to financial reports, the company's core product “City of the Rising Sun” had Q2 turnover of 0.91 billion, an increase of 14% year over year and a 2% month-on-month decline. However, due to further contraction in Q2 sales, Q2 sales expenses fell 9% month-on-month, and game profits were released. According to financial reports, the overall sales expense ratio of 1H24 of Rising Sun City was 22% (VS 1H23 35%, 2H23 34%), all with a year-on-month decrease of more than 10 pcts. 1H24 gaming subsidiary Shell achieved net profit of 0.82 billion, an increase of 50% year over year.

The computer business also showed strong growth in the first half of the year. According to financial reports, 1H24's AI/ICT business grew 27% year over year to 0.54 billion, and gross margin fell 11pct to 16.1%. Among them, smart telemarking/collection platforms, cloud services, etc. are growing rapidly, while low-margin cloud business expansion has dragged down overall gross margins. The revenue of Dingfu Smart, the main smart marketing and collection platform, increased 78% year-on-year to 68.33 million in the first half of the year, corresponding to an average monthly revenue of over 11 million in the first half of the year.

The core game has been steady since July, and two new products are expected to launch by the end of the year. According to point data, the month-on-month ratio of “Rising Sun” and “Fire of War” in July-August was still stable. In terms of new products, the sci-fi theme SLG+ simulation mobile game “Code DL” and the civilization-themed SLG+ simulation mobile game “LOA” are both expected to be launched overseas in Q4. Considering that the new products have a period of climbing and recycling, revenue growth is expected in the short term, and performance will rise to the next level in the medium term.

Adjust profit forecasts to maintain a “buy” rating. Considering the slowdown in revenue side core product flow growth and the rise in new products at the end of 24, revenue performance is relatively lagging behind; while the profit margin of old profit-side games exceeded expectations, we revised our revenue forecast but raised our net profit forecast. We estimated the company's 24-25 revenue to 6.62/8.18 billion (the original forecast was 6.86/8.73 billion for 24-25), increasing the 26-year forecast of 9.28 billion; net profit from 24-25 to mother is expected to be 1.27/1.45 billion (The original forecast was 1.01/1.37 billion for 24-25), adding 1.66 billion to the 26-year forecast. The current price is 14/12/11x for 24-26 PE.

The company's old products are stable, the new product cycle is imminent, the valuation is at the bottom, and the “buy” rating is maintained.

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