[Matters]
The company announced its 2023 results. In 2023, the company achieved a total operating income of 2,606 billion yuan (yoy -4.0%); achieved adjusted net profit of 0.05 billion yuan to reverse loss to profit; and achieved operating profit of 107 million yuan after deducting the impact of non-operating income and expenditure.
[Comment]
The performance of mini-games was excellent, and the performance of some products fell short of expectations, affecting performance. By business, during the reporting period, the company's game distribution business achieved revenue of 2,114 billion yuan (yoy +0.9%), and various mini games such as “Legend of the Kyushu Sword” and “National Gunman: King of the Frontier” brought in more than 600 million yuan in revenue, but during the reporting period, some products did not meet revenue expectations, compounded by the natural decline in old game flow to offset some of the increases; the game R&D business achieved revenue of 215 million yuan (yoy -52.5%), mainly due to the poor performance of “All Star Fighter”, and the “National Street Basket” launch delay; the IP licensing business achieved revenue of 2.57 billion yuan At 100 million yuan (yoy +74.7%), the company deeply lays out the “Legend of Sword and Fairy” IP industry chain cooperation and works with business partners in various fields to build the Fairy Sword IP universe. In terms of expenses, the company's sales and distribution expenses were 306 million yuan (yoy +28.8%), mainly due to the company's mini game products and launch costs; the company's administrative expenses were 526 million yuan (yoy -28.0%), of which R&D expenses were 370 million yuan (yoy -29.7%), mainly 1) the “City Lord World” project ended research and development, and the corresponding cost was reduced; 2) The company actively applied AIGC technology in the “Fairy Sword World” project to save resources, and completed the main R&D work and products of “Fairy Sword World” during the reporting period Entering the testing phase.
“Fairy Sword World” led the way, and 2024 ushered in a major product year. In 2024, the company has sufficient product reserves, including a variety of IP games and more than ten mini-games that have obtained versions. Among them, “Doulo Continent: Shrek Academy” was launched in January, with sales exceeding 100 million in the first month; “Doulo Continent: Reversal of Time and Space” and “Battle for the Sky: Summit Showdown” are scheduled to be officially launched on 2024H1. The company's blockbuster product “Fairy Sword World” is the first Guofeng Xianxia-themed open world game in China. The number of reservations for the game has now exceeded 4 million, and billing tests have recently begun, and it is scheduled to be officially launched within 2024.
The company has sufficient product reserves in 2024, and we look positively at the launch of “Fairy Sword World” to drive the company's performance growth. We adjusted the 2024-25 profit forecast based on the company's business performance and product schedule and added the 2026 forecast. We expect the company to achieve revenue of 36.3/67.5/7.24 billion yuan in 2024-26, and achieve net profit of 3.4/6.1/690 million yuan, EPS of 0.12/0.22/0.25 yuan/share, respectively, corresponding to 4 times the current share price PE8/4/4. Considering that the company's major IP product “Fairy Sword World” is expected to be launched within the year, the performance is expected. It maintains the 2024 PE 14 times valuation, corresponding to a target price of HK$1.87, maintaining a “buy” rating.