Matters:

Stock business consolidation and investment returns have put pressure on performance. The company disclosed the 24Q3 financial report, which achieved revenue of 1.3 billion yuan, YOY -24%, and QOQ -8%; realized gross profit of 0.68 billion yuan, YOY -38%, and QOQ -25%; realized net profit to mother of -0.21 billion yuan, YOY changed from profit to loss, QOQ -44%; realized net profit after deducting non-attributable net profit of 0.21 billion yuan, YOY changed from profit to loss, QOQ -177%. In the first three quarters, the company achieved revenue of 4.07 billion yuan, YOY -34%; realized net profit attributable to mother of -0.39 billion yuan, YOY changed from profit to loss; realized net profit deducted from mother -0.45 billion yuan, and YOY changed from profit to loss. In the first three quarters, the company sorted out its stock business. As a result, some one-time expenses were incurred. In addition, some games, film and television products fell short of expectations, putting pressure on performance.

Commentary:

The basic game stock management level has been corrected, and the effects of the adjustments and sorting are prominent. The 24Q3 game business achieved non-loss deductions of 94.67 million yuan. Of these, the company confirmed an investment loss of 0.116 billion yuan due to the losses of the invested companies this quarter. This means that after the exclusion, the game business has been adjusted for more than half a year, and profits at the operating level have been corrected.

Looking ahead, we believe that the basic stock market of the game business is expected to maintain the current trend.

Pipeline has abundant reserves of key products, and is optimistic about 25 years of product-driven management improvements. After screening, the company currently has a number of key products in its pipeline: the flagship IP MMORPG mobile game “World of Immortals”, which was publicly tested on December 19, 24; the two-dimensional city-themed open world “Different Ring” developed by its Magic Tower Studio has already begun to be recruited. We expect that the first test will be tested in 2024 and launched in 2025; the flagship IP MMORPG mobile game “Immortal 2”; and long-term reserves such as the open world game “Code Z”. We believe that in 25 years, the company is expected to break out of the adjustment period, driven by at least 2 key products, and the operating situation will improve markedly marginally.

The film and television business continues to focus on “improving quality and reducing quantity.” The 24Q3 film and television business deducted a non-loss of 87.49 million yuan, mainly due to the fact that sales prices of some movies and TV series were lower than expected. Looking ahead, we believe that in terms of the film and television business, the company is expected to continue to focus on the “quality improvement and reduction” strategy to adapt to market changes and make investment risks in film and TV drama projects more manageable.

Profit forecast and investment advice: We expect the company to achieve operating income of 5.5/8.1/9.8 billion yuan in 2024-2026 (the original forecast was 8.9/10 billion yuan in 24/25, with an additional 26 year forecast; the reduction was mainly due to product launch progress and performance falling short of expectations), YOY -30%/+48%/+21%; achieving net profit to mother -0.55/1.07/1.6 billion yuan (the original forecast was 1.28/1.82 billion yuan in 24/25, The 26-year forecast was added; the reduction was mainly due to product launch progress and performance falling short of expectations). Considering that the company has thoroughly sorted out the stock business in 24 years, the management level of the game business has now been adjusted. Combined with 25-26 year reserves for various key products, it is expected to drive a significant improvement in operating performance. The company was given a 25-year target PE of 25x, corresponding to a target market value of 26.7 billion yuan and a target price of 13.76 yuan. Maintain a “recommended” rating for the company.

Risk warning: macroeconomic fluctuations, product launch progress falling short of expectations, and increased industry competition.