NETDRAGON (00777): DeepSeek+ drives the bullish market of internet companies, leading the potential of AI+ games.

NetDragon benefits the most from the DeepSeek concept feast that has swept through major capital markets, especially the Hong Kong stock market. Since February, the performance of the Hong Kong stock market has been "far ahead" in the global market, continuing to lead the rise, with the Hang Seng Index rising by over 16% and the Hang Seng Tech Index rising by over 24%. The performance of tech stocks in particular has been outstanding, with most stocks rising by over 50%, such as NetDragon with a 130% increase, and KINGSOFT CLOUD and Tuva intelligent with an increase of over 80%. The core of this market surge can be attributed to the impact of DeepSeek. DeepSeek emerged with high performance, low cost, and open source features, accelerating the application of AI in terminals and the cloud. Games, as one of the mainstream applications of AI, have attracted widespread attention from the market, and NETDRAGON (00777) is a DeepSeek+ target in Hong Kong's tech stocks that has not yet been fully explored by funds, with a 25% increase in February, significantly lower than the sector's increase. The company began investing in AI research and development as early as 2017, and in its 2023 interim report, it disclosed its "AI+ game" attempts in fields such as AI+ R&D, intelligent NPC, and AI companionship. Over the past two years, NETDRAGON's "AI+ game" strategy has begun to be fully implemented in various business processes, and after the advent of DeepSeek, the company quickly integrated it into the game module. Through the "AI+ game" strategy, NETDRAGON continues to optimize various costs in game operation, realizing cost reductions and efficiency improvements, while also continuously innovating product content through AI to increase product lifecycles, meet player demands, and stimulate growth. In terms of reducing costs and increasing efficiency, for example, in the core game development department, the program center has fully integrated international leading AI tools like DeepSeek and Copilot into code writing and review, significantly improving the efficiency of code auditing for core games. In terms of game operations, the company has deployed an AI anti-cheating system developed internally with cutting-edge models, significantly improving the efficiency of cheat recognition and enhancing player experience. Additionally, in areas such as game planning, design, art, promotion, and customer service, the company has fully implemented DeepSeek and other large models to enhance player experience while significantly reducing employee and maintenance costs. For instance, in promotion, the company uses mainstream AI tools to boost resource allocation efficiency and reduce sales expense ratios; in customer service, they have introduced AI customer service seats to improve player consultation services and reduce manpower costs. In terms of effectiveness, the company's overall gross margin levels have continued to rise in the first half of 2022, 2023, and 2024, reaching 54.86%, 61.93%, and 66.62%, respectively, an increase of 11.76 percentage points. Their overall sales costs have also been optimized continuously, with levels of 12.01%, 11.36%, and 10.66% in the first half of 2022, 2023, and 2024, respectively, representing a cumulative reduction of nearly 1.5 percentage points. AI-native games driving growth In the gaming sector, NETDRAGON has actively developed many innovative features and content based on "AI-native" gameplay. The company has a range of popular games, with core IPs such as "Magic Domain," "Conquest," "Blade of the Soul," and "End of Oath," building a large player pool. Additionally, they have introduced multiple new products to overseas markets, such as the new games "Code Dragon" and "End of Oath," which are expected to be launched in Southeast Asia and Japan this year, respectively. Furthermore, the new game "Star Ocean Special Forces" will be released globally in 2026, potentially becoming a high daily active user (DAU) game. In terms of AI empowerment, for example, the core product of the MOBA track, "Blade of the Soul," has integrated its AI Agent companion tool into cutting-edge models, allowing its AI intelligent bodies to reach the level of advanced players and support a structured, cross-ability AI intelligent body system for dozens of heroes in the game. In the MMO track, the company has formed a "mysterious team" to develop an open-world game that will heavily feature AI NPC gameplay for "AI-native" content creation. In a mini-game being tested internally, they are attempting to create the game world entirely through text, art, programming, and other AI tools. NETDRAGON's "AI+ game" strategy is serious and solid, and has the potential to bring new vitality to this game "veteran" that has been in operation for 26 years. Likely to become a potential leader in AI+ games From a capital market perspective, the surge of Hong Kong tech stocks due to the emergence of DeepSeek after the Chinese New Year has made tech stocks one of the dazzling investment themes in the Hong Kong stock market. NETDRAGON, as a leading representative of AI edge application, has implemented several AI applications in mainstream game fields, driving cost reduction and efficiency improvement through AI, continuously enhancing player experience in hit games, increasing user payment rates, bringing incremental users, and extending game lifecycles. As a veteran player in the traditional game industry, NETDRAGON stands to be the biggest winner in this DeepSeek+ game. In addition to fully embracing AI in its core businesses of games and education, NETDRAGON's continuously forward-looking insights in the development of the technology industry cannot be overlooked. The company has invested in several industry-leading companies focused on the frontier of technology. ROKID recently gained widespread attention for its "AI glasses" product's integration with DeepSeek, and has been hailed as one of the "Seven Little Dragons of Hangzhou." NETDRAGON's $20 million equity investment in ROKID is not only expected to yield handsome returns, but their collaboration on developing VR educational content and more will bring wide growth opportunities in the future. At the CES 2025 exhibition in January, ROKID showcased AI+AR glasses Rokid Glasses and RoThe overseas version of kid AR Lite and other AR products have showcased China's AR technology strength and the unlimited potential of the AR industry to the global tech community. In the second quarter of 2025, Rokid will officially release Rokid Glasses which adopts an all-in-one design. With a total weight of 49g, it is equipped with a high-resolution 12 million pixel camera and lens with display function. Based on the Tongyi Qianwen big model, it can identify objects, solve problems, and even estimate the calories in fried chicken. With its powerful "AI+AR" product features, ROKID has gained high attention from consumers.DeepSeek+ will continue to drive the bullish market of science and technology stocks, but the valuations of most star companies have been pushed up. Investors may enter a new stage of further exploring small and medium-cap potential stocks. NETDRAGON will be one of the preferred choices for funds, with its "AI + game", "AI + education", and outstanding strategic investment capabilities. Undoubtedly, it will be sought after by a large number of investors as a rare "pure blood AI stock".