[CITIC Securities] Maintains NetDragon's “Buy” rating, with a target price of HK$18

Game and application services business: 2023 revenue of 4.19 billion yuan/year over year +6.6%, with a good recovery trend.In 2023, the company's game and application service business achieved revenue of 4.19 billion yuan/ +6.6%, accounting for 59.0% /+9.0pcts of the company's revenue; gross margin increased slightly by 2.6 pcts to 88.5%, mainly due to the company optimizing server costs to achieve cost reduction and efficiency. Operating margin 33.4% /+1.9pcts.Specifically: ① By region:Domestic game business revenue was +10.5% year over year, mainly due to the recovery of the industry after the pandemic, which rebounded driven by players' spending capacity and will; overseas game business revenue was +4.5% year over year.② Sub-platforms:PC/mobile revenue was +11.1%/+2.0%, respectively.③ IP minutes:“Magic Domain” IP performance continued to be impressive, with revenue of +12.4% to 3.4 billion yuan. Among them, the mobile game “Magic Domain” revenue was 2.9 billion yuan/+14% year over year, and the number of monthly active users of “Magic Domain” (mobile game) increased +50.4% year over year; “Soul Blade” IP returned to growth, with revenue +5.8% year over year.

Mynd.ai (formerly overseas education business): 2023 revenue of 2.91 billion yuan/-25.7% YoY, under pressure in the short term.In December 2023, the company merged with GEHI, a company listed on the NYSE, to complete the spin-off and listing of the overseas education business. After the merger, the entity changed its name to Mynd.ai. In 2023, Mynd.ai achieved revenue of 2.91 billion yuan/-25.7%. We determined that it was mainly due to global demand for education tablet hardware returning to a steady state after being released centrally during the pandemic, accounting for 41.0% /-9.0pcts of the company's revenue; the gross profit margin was 25.0% /+1.3pcts, mainly due to the decline in raw material prices and freight costs, and exchange rate effects; and operating losses of 93 million yuan, mainly due to one-time costs of spin-off and listing. In 2023, the company's Pumi tablet's global market share (excluding China) was 17.4%. The market share of the top three US/Germany/UK markets was 26.9%/22.9%/22.3%, respectively, maintaining the leading position in the world and major markets.

Future outlook: The game business is expected to grow steadily, and the overseas education business is expected to recover. 1) Game and application service business:We expect the company's game business to maintain steady growth. Among them ① in terms of old games, we expect the company to continuously optimize the game experience and increase players' stickiness and willingness to pay; ② in terms of new games, according to the company's performance conference, the company's core IPs such as “Magic Domain”, “Spirit Blade”, and “Conquest” will all launch new games in the second half of 2024. In addition, several new IPs will be released on 2H24, which will continue to drive the growth of the company's game business.2) Mynd.ai:We expect the company's education business to return to steady growth in 2024. On the one hand, it will seize the low-end tablet hardware market share through the ActivPanel Lx product line, and on the other hand, obtain software subscription revenue through the launch of the Explain Everything Advanced SaaS solution.

Risk factors:Macroeconomic growth is under pressure; game development falls short of expectations; raw material prices have risen; overseas education policies have changed; orders have fallen short of expectations, etc.

Profit Forecasts, Valuations, and Ratings:Considering the optimization of the company's sales & management expenses ratio, we raised the company's 2024-2025 EPS forecast to HK$2.04/2.40 (the original forecast was HK$1.86/2.39) and added the 2026 EPS forecast to HK$2.55, giving the company a comprehensive target market value of $9.2 billion in 2024, corresponding to a target price of HK$18, maintaining a “buy” rating.