Guotai Haitong: Muyu AI drives transformation, core business stabilizes and rebounds, maintain "Overweight" rating on NETDRAGON (00777)

Guotai Haitong issued a research report stating that NETDRAGON (00777) has made key progress in its AI-native transformation, with organizational efficiency improvements delivered, game business stabilizing and recovering, and Mynd.ai significantly narrowing its losses. A 13x PE for 26E is applied, with a target price of HK$10.4, maintaining the "Overweight" rating. Guotai Haitong's main views are as follows: Profit resilience stands out, shareholder returns continue to be delivered NETDRAGON achieved revenue of RMB 2.09 billion in 26H1; gross margin was 69.9%, up 0.4pct YoY. The company deepened cost control and organizational efficiency improvements, achieving operating profit of RMB 140 million in 26H1, up 24.1% YoY; net profit attributable to shareholders was RMB 40 million, up 20.0% YoY. The board approved an interim dividend of HK$0.50 per share and committed to a total distribution of no less than HK$600 million within 12 months from March 26, 2026. As of the end of June, net cash and liquid investment reserves were close to RMB 1.8 billion. Game revenue stabilizes and recovers, Muyu AI opens a new growth track Revenue from the gaming and application services business in 26H1 was RMB 1.59 billion, up 3.1% QoQ; gross margin was 83.3%; operating profit was RMB 460 million, up 10.3% QoQ. Among this, game business revenue increased 2.3% QoQ, fully validating the operational resilience of flagship evergreen IPs: the MAU of the MoYu IP exceeded 3 million, up 24.1% YoY and 15.8% QoQ, driving revenue up 3.7% QoQ; overseas revenue of the Conquer IP (in USD) and PC game revenue of the Hero's Blade IP increased 19.3% and 4.4% YoY, and 6.5% and 2.3% QoQ, respectively. "Gaming + cultural tourism" continued to deepen. The AI employee matrix achieved full-chain efficiency improvements across R&D, operations, and maintenance, with the proportion of workload handled by AI employees rising to 35-40%. In the application services field, Muyu AI was officially released and launched global testing, with systematic tuning around content creation and education scenarios; Hong Kong subsidiary Creative Concepts deepened strategic cooperation with WENGE AI to expand the enterprise-level AI market in Hong Kong and Macau, jointly building the scientific research large model Panshi and the enterprise-level security Agent platform Longgong International Edition. Mynd.ai's operational transformation delivered remarkable results, with losses significantly narrowed Mynd.ai revenue in 26H1 was RMB 510 million; gross margin was 27.7%, up 2.3pct YoY; operating expenses were RMB 250 million, down 29.6% YoY; net loss was RMB 160 million, significantly narrowed by 30.8% YoY; adjusted EBITDA loss was RMB 60 million, improving 53.7% YoY. The revenue structure continued to optimize, with service and SaaS revenue growing YoY and recurring revenue momentum strengthening.