[Bank of Communications International] Pay attention to the performance of NetDragon's new games, maintain a "buy" rating and a target price of HKD 15.

Continuing improvement in profit margin:The company's 1H24 revenue was RMB 3.3 billion. Among them, gaming and application services revenue was RMB 2.12 billion, a slight decrease of 0.8% year-on-year, mainly due to the decline in overseas gaming revenue. Mynd.ai revenue decreased by 23.5% year-on-year to RMB 1.18 billion, primarily due to the normalization of hardware demand. The gross margin improved by 4.5 percentage points year-on-year to 66.6%, mainly benefiting from the increased proportion of high-margin gaming revenue. Adjusted net income was RMB 0.56 billion, and adjusted net margin was 16.9%. In addition, the company announced a mid-term dividend of HKD 0.4 per share.

Stable game revenue, focusing on the performance of new games:The company's game business in 1H24 maintained relative stability, with revenue of RMB 1.86 billion. Among them, domestic online games continued to grow, while mobile games declined. The decline in overseas gaming revenue was mainly due to the impact of cheating on the overseas version of the game "Mo Yu" and the temporary power interruption in Egypt on the overseas version of the game "Zheng Fu". These issues are gradually improving, and overseas revenue is expected to recover in the second half of the year. The core product of domestic online games, "Mo Yu," maintains good user stickiness, with metrics such as MAU and DAU achieving growth. In terms of game reserves, the casual mobile game "Code-Alpha" based on the "Conquer" IP and the new IP MMO mobile game "Code-Dragon" are planned to be launched in the second half of the year. The company's important product, "Mo Yu Reborn" (i.e., "Mo Yu Remake"), is expected to be launched in the first half of next year, which is expected to drive the company's new drive in the game business. With the improvement of overseas business and the preparation for the launch of multiple mobile games, it is expected that the company's game business will return to growth in the second half of the year.

Continued focus on education business SaaS opportunities:Due to the normalization of hardware demand, Mynd.ai's revenue in 1H24 continued to decline year-on-year, but its market position remained leading. With coverage of 1.5 million classrooms globally, the company will further focus on SaaS business, transitioning from pure hardware to hardware + services. It is expected that future service revenue will become an important driver of growth for the company's education business.

Investment risks:Gaming performance fell short of expectations; the recovery of the education business fell short of expectations.