Zheshang: Initiates NETDRAGON (00777) with a "buy" rating. Dual-drive of gaming and education, joint venture with Tudou will blossom soon. Target price is HK$25.25.

Zheshang releases the first coverage report on NETDRAGON. The report points out that NETDRAGON (00777) has performed well in the gaming + education dual core business since 25H2, with multiple milestones exceeding expectations. The new game "Code MY" has made breakthroughs in various technologies, significantly improving the existing gaming business, and the expansion of the IP map is expected to increase the level of user payments. The update cycle for education equipment in North America is approaching, the company has a high market share in the international market, and is expected to drive the recovery of the education business. As a form of IP derivatives and monetization of idol creation, live streaming has far greater monetization capabilities than traditional broadcasting. With the support of the efficiency of the content supply chain, platform coordination advantages, and the anchor cultivation system, it constitutes the core barrier of the company. The bank gives a target market value of HK $13.46 billion to NETDRAGON, a target stock price of HK $25.25, and a "buy" rating. Zheshang's main points are as follows: - The company's gaming + education dual core business has performed well since 25H2, with high expectations for the new game reserve "Code MY", and the education business supported by AI is expected to turn losses into profits after the public health incident. - The income from the investment in the Shuaiku live streaming business is significant, and under platform policies such as Byte's "High-quality live broadcast plan", it is expected to continue to exceed market expectations. - The company's cash on hand is RMB 1.5 billion, and at the mid-year press conference in 25H1, it promised shareholder returns of not less than HK $600 million in the next 12 months, implying a return rate close to 10% of the current price. Unexpected Points: 1) The market believes that the live streaming industry has entered a stage of competition in terms of quantity, with slowing industry growth. Shuaiku's core audience is mainly female and emphasizes interaction, representing an expansion of traditional live broadcasting that can increase the level of paying viewers and expand the user base. Shuaiku's core is IP, which besides traditional revenue-generating forms such as tipping and product recommendation, also includes IP derivatives and idol creation for monetization, with much higher monetization capabilities than traditional live streaming. 2) The market believes that the company's gaming business relies heavily on old IPs such as "Moyu", and it is difficult to grow the business by developing new games based on old IPs. The bank believes that the company's classic IPs have stood the test of time, retaining many loyal fans with relatively stable cash flow. The new game "Code MY" has technological breakthroughs in graphics and AI systems, upgrading the existing games, and potentially increasing the payment levels of loyal users. 3) The market believes that online education demand weakened after the public health incident, making it difficult for the education business to recover. The bank believes that the update cycle for education equipment in North America is nearing, creating demand for replacement devices that can drive the recovery of the education business. Subsidiary Promethean has a significant market share in the international education market. Core barriers: Live streaming: - Efficiency of the content supply chain: Shuaiku's backend team of nearly 400 employees achieves a closed loop of "new script development + data feedback iteration" by monitoring interactive data for rapid optimization of gameplay design. - Platform coordination advantages: Platforms like Douyin provide traffic bias, reducing advertising costs. - Anchor training system: Using a "long-term contract + cultivation from scratch" model, reducing dependence on top players and improving user stickiness through a sense of cultivation. Profit forecast and valuation: The bank predicts that the company's operating income for 2025-2027 will be respectively RMB 4.67 / 4.88 / 5.096 billion, with year-on-year growth rates of -22.77% / 4.45% / 4.47%. Net profit attributable to shareholders will be RMB 415 million / 650 million / 725 million, with year-on-year growth rates of 33.52% / 56.49% / 11.63%. At the current time point, the corresponding PE ratios are 15.16 / 9.69 / 8.68 times. According to the SOTP valuation method, the bank uses Tencent, XD INC, Tanwan, NetEase, Guangzhou Shiyuan Electronic Technology, Hitevision Co., Ltd., Shenzhen KTC Technology, Kwai, and Bilibili as comparable companies, giving the gaming business 14X PE, the education business 1X PS, and a valuation of 15X PE for the Shuaiku investment, with a target market value of HK $13.46 billion.