NETDRAGON (00777): Double business engine with strong momentum, combined with growth and high dividend increase space can be expected.

On August 29, NETDRAGON (00777) released its mid-term financial performance for 2024. During the period, the company's revenue was 3.3 billion yuan; pre-tax profit reached 700 million yuan, an increase of 22% year-on-year. In addition, NETDRAGON announced a distribution of a mid-term dividend of HK$0.40 per ordinary share. From this financial report, it can be seen that NETDRAGON has shown resilience under pressure, demonstrating a solid business foundation. The market's expectation for NETDRAGON, a company driven by the dual engines of "gaming + education," is whether it can unleash the growth potential in the second half of the year and soar higher. It is believed that NETDRAGON's dual-core growth strategy is steadily advancing. The new product of the gaming business, "Code-Alpha," is expected to be officially launched in the second half of the year and expanded to multiple countries. "The Oath of the EndOverseas Edition" has achieved good test data, and it is expected that this new second-dimensional game will be launched in the Japanese market within 6 to 9 months in the future. In addition, "AI + education" has also entered the fast lane of development. With the diversified creation of the gaming IP matrix and the driving force of education + AI for overall growth, it will boost NETDRAGON's long-term growth momentum. Gross profit margin achieves a "triple jump," excluding one-time deferred tax adjustments, the full year still maintains a target of one billion yuan in net profit. In the first half of 2024, NETDRAGON's core financial indicators continued to improve, especially as the gross profit margin achieved a "triple jump," providing security for the accelerated release of future performance. According to statistics, the gross profit margin of NETDRAGON was 54.79% in the first half of 2022, increased to 62.13% in the first half of 2023, and further increased to 66.62% in the first half of 2024. This gross profit margin is also the best level in the past three years. The gross profit margin is not the only criterion for investment decisions, nor is it a key that can be universally applied, but it is the key to opening the door to analysis. At the same time, the comparative analysis of gross profit margin is often the first step in analyzing the profit and loss statement, followed by analysis of operating expenses, asset impairments, etc. Specifically, the gross profit margin of the Mynd.ai business increased by 4.3 percentage points year-on-year to 29.7%; the gross profit margin of the gaming and application service business was 87.2%. After the overall increase in gross profit margin, the company's profit performance is remarkable. During the period, the net profit attributable to the parent company reached 4 billion yuan. If the one-time deferred tax adjustment (about 2 billion yuan) is excluded, the net profit attributable to the parent company actually increased by 24% year-on-year in the first half of the year. Management stated at the performance release conference that if the deferred tax adjustment is not included, it is expected that the full-year net profit attributable to the parent company in 2024 will be consistent with Bloomberg's current expectations (approximately 10 billion yuan). In addition, the company's lean management has released elasticity, with various expense ratios steadily declining. Among them, sales and marketing expenses were significantly optimized, decreasing by 20.5% year-on-year to 352 million yuan. Research and development expenses were 696 million yuan, an 8.6% increase year-on-year, accounting for 21.1% of revenue, an increase of 3.7 percentage points year-on-year. The company continues to increase research and development investment to enhance research and development capabilities, the vitality of classic IP games continues to increase, and the IP matrix is expected to continuously expand, driving the continuous growth of game quality and revenue. In terms of cash flow, as of June 30, 2024, NETDRAGON's total cash, cash equivalents, and short-term investments reached 3.74 billion yuan, an increase of 11% compared to 33.7 billion yuan at the end of December 2023. The strong cash reserve provides the company with more financial flexibility and supports business releases with funding support. Rich IP game reserves, incremental releases imminent, advancing global strategy, AI opens up market space NETDRAGON's performance is driven by "education + gaming" for long-term stable and high-quality growth. The revenue from the gaming and application services business during the period was 21.2 billion yuan, basically flat compared to the same period last year, contributing more than 60% of revenue. Mynd.ai's revenue was 11.8 billion yuan, accounting for approximately 35.7% of total revenue. In conclusion, the flagship IP of the gaming business builds a solid foundation for gaming revenue. In addition, AI is driving a comprehensive upgrade in educational informatization, empowering the company's education business for long-term sustainable development, which will further drive the increase in NETDRAGON's valuation level. Specifically in terms of the gaming business, through a global strategy, this business attracts players on both PC and mobile platforms, creating multiple IP products for gamers, continuously innovating in technology and developing new gameplay to maintain high user stickiness and willingness to pay. During the period, revenue from PC games was 15.8 billion yuan, an increase of 1.5% compared to the previous period, accounting for 85% of gaming revenue. This growth was mainly driven by the domestic revenues of IP games such as "Moyu", "Conquest", and "Blade of Soul" all showing growth in the same period. The revenue from mobile games during the same period was 2.8 billion yuan, an increase of 0.3% compared to the previous period, accounting for 15% of gaming revenue. It is expected that the launch of multiple new games will drive continued growth. In terms of regions, the company's domestic revenue was 16.1 billion yuan, an increase of 3.5% compared to the previous period, accounting for 87% of gaming revenue; overseas revenue was 2.5 billion yuan, accounting for 13% of gaming revenue. It is believed that with the launch of multiple new products in overseas markets, performance will be boosted. For example, the new game "Code-Alpha" is expected to be launched in multiple countries; "The Oath of the EndOverseas Edition" has achieved good test results and is expected to be launched in the Japanese market within the next six to nine months. In addition, the new game "Star Sea Assault" will be launched globally in 2025 and has the potential to become a heavyweight new game with a high number of daily active users (DAU). Looking to the future, with the recovery of the domestic market and the accelerated expansion of the gaming business overseas, coupled with the steady operation of flagship IP products and the continuous enrichment of IP products, the company's performance increment release is imminent. Specifically in terms of products, the company continues to develop new works based on flagship games to extend the life of the IP. Currently, the company's core IPs include "Moyu", "Conquest", "Blade of Soul", "The Oath of the End", which have built up a large player pool. In the first half of 2024, the number of new users for the core domestic PC game of "Moyu" increased by 46.4% year-on-year, and MAU increased by 13%.0.8%. Currently, NETDRAGON has formulated a comprehensive plan to further develop the "Eudemons Online" IP, focusing on rejuvenation and diversification, upgrading game graphics, cross-category collaboration, and the development of new "Eudemons Online" IP products in the entertainment industry. The commercial value of the "Eudemons Online" IP is expected to be unlocked, and the vitality of the IP is expected to continue to increase in the future, driving the company to achieve sustained growth in performance.In addition to the "Magic Domain" IP, NETDRAGON still has many classic IPs, building a complete IP game matrix. The company's other flagship IP, "Conquest," as a pioneer in China's overseas internet industry, continues to expand to other countries in the Middle East and North Africa region, with APA (average paying users) increasing by 16.7% year on year. In addition, the PC revenue of the "Blade of Kings" IP increased by 29.6% year on year, continuously realizing commercial value. In the view, as the industry enters the era of refined products, industry growth is more dependent on ARPU driven by user payments. Game companies with classic IPs naturally have more abundant user base and better user payment potential. By developing refined IP games, it is expected to deeply explore user willingness to pay and achieve long-term operations. NETDRAGON continuously attracts new players through IP boutique games and plans to implement a multi-pronged growth strategy for the Magic Domain IP, including achieving stable growth of existing games, launching "Magic Domain Resurgence" and "Magic Domain Pocket 2.0" (planned to be released in early 2025 and 2026 respectively), attracting and consolidating a wide range of Magic Domain IP players with validated revenue models. As the company leverages its IP advantages in the global market, it will drive steady growth in game revenue. Focusing on the education business, NETDRAGON's overseas education subsidiary Mynd.ai was listed in the United States at the end of last year, with a significant reduction in operating cost efficiency. Sales expenses decreased by 25.7% year-on-year, gross profit margin increased by 4.3 percentage points year-on-year, and adjusted EBIDTA increased by 7.5% year-on-year. Operating cash flow increased by 34 million yuan, a 38.2% year-on-year increase. Currently, Prometheus' leading position is stable, with an installation base of over 1 million classrooms, and a leading market penetration rate in the interactive display market. Thanks to Prometheus' strong brand awareness and global distribution channel network, the company's educational business has significant growth potential. It is worth noting that with the advancement of artificial intelligence technology and the maturity of application scenarios, educational informatized products will once again usher in upgrades, and AI hardware and software will reshape the industry space. Recently, NETDRAGON has made progress in AI-empowered education and layout. With the support of the Ministry of Higher Education and Scientific Research in Thailand, the company announced a strategic initiative to develop an advanced AI-empowered education platform, aom-ai, which is expected to be launched within the year. In Saudi Arabia, the company is actively discussing multiple education technology cooperation projects with the Ministry of Education in the K12 education and technology and vocational training fields. In short, optimistic about AI + education, empowering the company's business scale to continue growing and optimizing profits. In summary: the configuration of high dividend targets highlights cost-effectiveness, and long-term outlook for performance and valuation resonance From an investment perspective, NETDRAGON has high long-term investment value. On the one hand, as a high dividend target, the cost-effectiveness is highlighted. NETDRAGON has been paying dividends twice a year since its listing, with a stable dividend payout ratio and a high dividend return rate, maintaining a dividend of HK$0.4 per share in mid-2024, with a TTM dividend yield of 8%. Particularly in the more cost-effective Hong Kong stock market, the undervalued attributes of high dividend targets are more prominent, with greater upward elasticity and price advantages. According to brokerage reports, the performance of the gaming sector in the first half of this year was mixed, with the Hong Kong stock market outperforming, and A shares relatively weak, with an average PE ratio of 17.9 times for the sector. In comparison, as a high dividend target, NETDRAGON is significantly undervalued, with a PE ratio of about 12 times and a PB ratio of less than 1, providing a significant room for valuation adjustment. On the other hand, NETDRAGON's performance is stable and long-term market value remains in an upward channel. As the gaming business continues to deliver high growth and cash flow steadily grows; the education business opens up new growth opportunities under AI empowerment, achieving resonance between performance and valuation. From a more macro perspective, the impact of the global commercial achievements of "The Myth: Wukong" lies in the deep exploration of the needs and consumption willingness of domestic PC and console game users, while also validating the feasibility of the commercial model of high-quality domestic end games. In the long run, with the improvement of quality on the supply side, domestic end games are expected to tap into the incremental market of billions in China and overseas, enhancing the overall vitality of the gaming industry. Moreover, the Hong Kong stock market has seen four consecutive weeks of gains recently, and the view that Hong Kong stocks have better elasticity than A shares under short-term interest rate cuts and policy expectations continues to be validated. Therefore, beneficiaries of growth sectors on the denominator logic such as gaming, and even high-quality endgame targets, may have greater elasticity. In short, with the steady advancement of the dual-driven growth strategy, NETDRAGON's business foundation is solid, with a high level of gross margin steadily increasing, actively exploring new growth opportunities, and fully realizing its growth potential. With low valuation and high dividend yield, NETDRAGON is expected to be favored by long-term funds.