[BOC Securities] Overseas education tablets maintain a leading position, and the game business is growing steadily

Game revenue has achieved high single-digit growth, and Magic Domain IP has strong vitality.In 2023, the company's game and application service revenue was 4.19 billion yuan, +6.6% year-on-year, accounting for 59% of revenue; operating profit was 1.4 billion yuan, +12.9% year-on-year. Among them, game revenue was 3.8 billion yuan, +9.6% year over year; domestic/overseas game revenue was +10.5%/+4.5% year over year, respectively; and PC game/mobile game revenue was +11.1%/2.0% year over year to 32/590 million yuan, respectively. “Magic Domain” IP revenue was +12.4% to 3.4 billion yuan. Through high-frequency launch of new gameplay, new content, and improved player experience, the average gaming time of Magic Domain IP users was +50.4% YoY in 2023. “Soul Blade” IP revenue increased 5.8% year over year. In 2024, the company plans to launch new Magic Domain IP content and new types of games, and expand its share in markets such as Japan, the Middle East, and Indonesia.

Promethean continues to maintain its leading position in the market and starts monetizing SaaS services.In 2023, Mynd.ai (former overseas education business) revenue was 2.91 billion yuan, -25.7% year-on-year, accounting for 41% of revenue; operating loss was 93 million yuan (2022 operating profit of 30 million yuan). The decline in revenue was mainly due to the global education interactive tablet entering an adjustment period in the post-pandemic era, and both 2021 and 22 had a high base. The subsidiary Promethean continues to maintain its leading position in the market, reaching 17.4% of the global K12 interactive tablet market share (excluding China) and 21.1% in the 23Q4 single quarter. Promethean recently launched a comprehensive SaaS solution and will continue to promote the development of the software business in 2024; Mynd.AI will continue to invest in R&D, maintain a leading position in the high-end market, and increase the penetration rate of the middle and low end markets.

The gross margins of both major businesses have increased, and investment in R&D has increased.In 2023, the company's gross profit margin was 61.9%, +7.1 ppts year on year; of these, the gross profit margin of the game and application service business was 88.5%, +2.6 ppts year over year, and Mynd.ai gross profit margin was 25.0%, +1.3 ppts year over year. Sales/management/R&D expenses were 11.4%/16.9%/19.5%, respectively, -0.7/+4.5/+3.9 ppts year-on-year. Cash flow from operating activities in 2023 was 1.1 billion yuan, +4.2% year-on-year. The final dividend for 2023 was HK$0.4 per common share. Together with the interim dividend, the total dividend for the year reached HK$1.8 per common share.

NetDragon actively lays out the application of AI technology in business.The usage rate of AI in game art production increased from 14% in 23Q1 to 58% in 23Q4, and the labor cost saved by using AI in 23Q4 increased 300% compared to 23Q1. Furthermore, in 2023, the company made significant progress in developing AI companion technology in MOBA games, and AI NPCs are expected to be integrated into new open world MMORPG games in the future.

The recovery in education tablet sales in 2023 was slightly slower than our expectations, but due to the faster growth in game revenue and the increase in gross margin, the company's overall profit level is not much different from our previous expectations; we expect the company's net profit to be 10.24/12.11/1,353 billion yuan in 2024/25/26, corresponding to 5.2/4.4/3.9 times PE.Maintaining a buy rating。

Product orders fell short of expectations; game performance fell short of expectations; content regulation exceeded expectations; industry competition intensified.