[Anxin International] Netdragon's new gaming product is ready to be launched, maintaining a "buy" rating with a target price of 16 Hong Kong dollars.

The gaming market remains stable.The company's gaming business revenue in 1H24 reached 1.86 billion yuan, accounting for 87.8% of gaming and application service revenue, of which domestic PC game revenue reached 1.36 billion yuan, a year-on-year growth of 2.1%. The three flagship IPs, "Myth", "Conquest", and "Soul of the Blade", have all achieved year-on-year and quarter-on-quarter growth in domestic PC game revenue.

New gaming products are poised to be released.The company's subsequent gaming pipeline is progressing smoothly. 'Starship Assault' began testing on TapTap in July and received a user rating of 8.0. It is expected to be globally released in 2025. 'Code-Alpha' began testing in overseas markets in June and is expected to bring additional revenue in the second half of the year. 'Oath of Demise' received positive feedback during testing in overseas markets and is expected to be officially launched in the first half of 2025.

The challenges and transformation opportunities faced by the education sector.The overseas education subsidiary Mynd.ai (of which the company holds 74.4% equity) recorded revenue of 1.18 billion yuan in the first half of 2024, with a gross profit of 0.351 billion yuan and a gross margin of 29.7%. In the first half of the year, the industry in most major regional markets faced a slowdown in demand. After the end of the COVID-19 pandemic, education departments in various regions are expected to return to normal budgets, and macroeconomic inflation has affected the budget allocation decisions of schools, leading to a continued slowdown in hardware shipments. The global classroom education technology market is currently in the early stages of transitioning from a hardware-led model to an integrated model with software and services at its core. As a market leader, Mynd.ai has installation bases in over 1 million classrooms, facing significant transformation opportunities.

Investment advice: In 2024, due to the increase in deferred tax items by the subsidiary, there was a temporary negative impact of over 0.2 billion yuan on this year's tax revenue. If non-recurring items are added back, we estimate the company's adjusted profit to be approximately 1 billion yuan. The company has sufficient cash on hand, with cash and cash equivalents of about 3.22 billion yuan in the medium term, and has announced plans to distribute an interim dividend of 0.4 Hong Kong dollars per share, totaling approximately 0.213 billion Hong Kong dollars, emphasizing the importance of shareholder returns. Despite the slowdown in the company's business growth, taking into account the company's low valuation and shareholder return performance, we maintain a 2024E/2025E PE ratio of 10.0x/7.0x and a target price of 16.0 Hong Kong dollars, with a 'buy' rating.We maintain a target price of 16.0 Hong Kong dollars and a 'buy' rating for the company.

Risk warning: industry policy risks; gaming business development falling short of expectations; education orders falling short of expectations.