(Report producer/analyst: China Securities Construction Investment Yang Aili)
1. Overview: "Zhengtu" IP lays the foundation, and the equity structure is clear and stable
Founded in 2004 by Shi Yuzhu, Giant Network is mainly engaged in game development and operation, and currently has two core product lines of the "Journey" series and "Ball Wars", which are national war MMORPGs and multiplayer casual competitions.
2004-2013: "Journey" started the "journey" of the end game: After its establishment in 2004, the company launched its first online game "Journey" in 2005, and by 2007, the number of simultaneous online users had exceeded 1 million, becoming the third online game in the world at that time with more than one million simultaneous online games, and exceeded 2.1 million in 2008. The company was also listed on the New York Stock Exchange in 2007. Since then, "Journey Nostalgic Edition", "Green Journey" and "Journey 2" have also been launched.
2014-2018: Change hands and expand the "Journey" product territory: In 2014, the company was delisted from the US stock market, and in the same year, the mobile game publishing company Giant Mobile was established, and the mobile game strategy was made public, officially transforming the mobile game layout, and released more than 10 mobile games such as "China Good Dance" and "Guardian of the Giant", as well as the first mobile game "Journey Pocket Edition" in the "Journey" IP series. In 2016, the company was listed on the A-share market through the backdoor of Century Cruises. Since then, "Ball Wars", "Journey" mobile game, "Journey 2" mobile game, and "Green Journey" mobile game have also been launched one after another.
2019-2022: New products are missing, focus on new travel research and development. Since 2019, the company's revenue has continued to decline, from 2.57 billion yuan in 2019 to 2.12 billion yuan in 2021, mainly due to the lack of natural decline in the turnover of new products and old games with high turnover; At the same time, the company concentrates on the development of new games.
2023: Usher in the big year of products. The company will launch 3 new products this year, including the social game Super Sus, which launched in January; The "Journey" series of newbie games "Original Journey", personally supervised by founder Shi Yuzhu, was launched on March 24; "Dragons and World's Ends" is expected to be available in the summer.
The "Journey" series and "Ball Wars" contributed to the revenue base. Since its A-share listing in 2016, about 95% of the company's revenue has come from the game business, of which mobile games account for 50%-55% and mobile games account for 40%-45%. According to the 2019 annual report inquiry letter, the total revenue of the company's five main games, "Journey" end game, "Journey 2" end game, "Journey" mobile game, "Journey 2" mobile game, "Ball Battle" total revenue of 1.906 billion yuan, accounting for 77.69% of all terminal games and mobile game revenue, accounting for 74.14% of the company's total revenue.
Since 19 years, the company's revenue has begun to decline, mainly due to the divestment of the financial business & the decline in the main game business. From 2016 to 2018, the company's revenue continued to rise, reaching 2.91 billion yuan and 3.78 billion yuan in 2017/2018, respectively, an increase of 25.1% and 30% year-on-year, but the main driving factor was the new Internet finance business, and the game business showed a downward trend after 2017.
2017: Growth was mainly driven by mobile games and other businesses. Among them, the revenue of mobile game business increased by 47.7% year-on-year to 1.41 billion yuan, and the proportion of revenue increased by 7.5pct to 48.6%, mainly due to the steady flow of "Ball Wars" and "Journey Mobile Version" launched in the early stage, and the incremental turnover contributed by new games such as "Glorious Mission", "Full Moon Night" and "Street Basket"; Other business income reached 320 million yuan, 123 times that of 2016, which was the company's inclusion of Wangjin Finance in the scope of merger, and provided online lending information intermediary services through its mutual gold car loan platform Touhe.com, with a net profit attributable to the parent of 270 million yuan that year, exceeding the performance commitment.
2018: Growth was mainly driven by internet finance business. The increase in revenue was mainly due to the increase in the transaction amount of investment matching, which led to an increase in service revenue, resulting in a year-on-year increase of 253% in other revenue to RMB1.13 billion, and the proportion of revenue increased by 19pct to 30%. However, due to the impact of P2P industry regulatory policies, the company disposed of the equity of Wangjin Financial at the end of the year and no longer included it in the scope of the merger. In addition, the revenue of mobile games and mobile games remained stable, "Journey 2" mobile game was launched during the year but did not contribute significantly to incremental revenue, "Green Journey Mobile Game" and "Inuyasha: Naraku's War" were delayed due to industry policy adjustments and the version number was not opened.
From 2019 to the first three quarters of 2022: the financial business was divested, and the flow of old games declined. The revenue in 2019 was 2.57 billion yuan, which was basically the same as the total revenue of 2.65 billion yuan after excluding Wangjin financial business in 2018, but it continued to decline from 2020 to 2.12 billion yuan in 2021, and the revenue of mobile games and mobile games declined. In terms of mobile games, new games such as "Pascal Contract" have not significantly contributed incremental revenue, a number of new games are still under development, the flow of mobile games such as the Journey series of mobile games and "Ball Wars" has naturally declined, and the company has gradually sold businesses with low correlation with key tracks such as Hefei Lingxi. In terms of end-game, end-game revenue has declined continuously since 2016 due to the natural decline in the flow of existing games such as the Journey series and the "Xianxia World" end-game, as well as the slowdown in the growth rate of end-game games across the industry. In the first three quarters of 22, it increased by 2% year-on-year to RMB1.57 billion, mainly due to the increase in mobile game revenue driven by the update of the major version of Zhengtu Mobile Game and "Ball Wars" and increased brand promotion, and 1H22 increased by 12.2% year-on-year to RMB600 million.
The shareholding structure is clear and stable, and Shi Yuzhu holds 36% of the shares as the actual controller. As of the end of the third quarter of 2022, the company's largest shareholder was Shanghai Giant Investment Management Co., Ltd., and the second largest shareholder was Shanghai Tengpeng Investment Partnership (Limited Partnership), with shareholding ratios of 27.87% and 9.66% respectively. At present, Shi Yuzhu holds 97.86% of the shares of Shanghai Giant Investment Management Co., Ltd. and 88.55% of the shares of Shanghai Tengpeng Investment Partnership (Limited Partnership), with a total indirect shareholding of 36.17%, and is the actual controller of the company.
2. Old games: well-known IP long-term operation, stable flow foundation consolidated
2.1 Journey Series: Well-known IP of National War RPG, with a cumulative revenue of more than 20 billion yuan The "Journey" series is one of the company's core self-developed product lines, including 4 terminal games and 4 mobile games. According to the company's announcement, in the first three quarters of 2015, the Journey series accounted for 64% of the company's revenue, and as of the beginning of 2020, the cumulative revenue of all products exceeded 20 billion yuan, and we expect the current Journey series of games to account for about 55%-65%. The company will launch the latest Journey series mobile game "Original Journey" on 3/24/23, the first Journey series mobile game produced by founder Shi Yuzhu, focusing on online performance.
2.1.1 "Journey" end game: long life cycle of national war MMO and great IP influence "Journey" end game was launched in 2005 and is a well-known domestic national war MMORPG page game, which has been in operation for nearly 18 years. The game is based on Chinese martial arts culture and kingdom dynasties, players can get rich gameplay experience in the game, including national war, dart, espionage, temple brick moving and other game tasks, PK war, casual competition, love cultivation and other gameplay, as well as family, couple and other game social relations. "Journey" is the first F2P mode game in China, which attracted a large number of players in the early days.
Before 2005, domestic online games basically adopted the point card charging model, that is, the game was charged according to the player's playing time, and the player extended the time by purchasing a recharge card. The "Journey" terminal game has created a free-to-play and prop-charging model, which has greatly lowered the threshold for game play. Two years after its launch, the number of simultaneous online users of "Journey" exceeded 1 million, becoming the third Chinese online game in the world with more than 1 million online users after "Fantasy Westward Journey" and "World of Warcraft".
Large number of users and continued high activity: According to the official operation team of Zhengtu, the highest number of simultaneous online games reached 1.055 million on May 20, 2007, becoming the third Chinese online game in the world with more than one million simultaneous online at that time; On April 26, 2008, the number of online games on "Journey" reached 2.1 million at the same time. According to the company's announcement, nearly 10 years after its launch in the third quarter of 2015, the number of active users of "Journey" is still 5.051 million, and the number of quarterly paid users is 1.52 million.
High player participation and strong willingness to pay: According to the official operation team of Zhengtu, the "Journey" end game was launched until the end of 2020, with an average of 3,956 national war gameplay per week, and the maximum number of participants in a single national war was 12,960; A total of 15.65 million families have been established, with an average of 24,475 clan battles per week; Journey 2 make up 950 in-game couples every day. According to the official and company announcements of the Zhengtu Operation Team, as of the end of 2020, the number of registered users of the whole series exceeded 500 million, and the cumulative revenue exceeded 20 billion yuan.
2.1.2 "Journey" series of mobile games: the performance is relatively dull Compared with the end game, the performance of the mobile game series is not bright. From the best-selling list ranking, according to Qimai data, since the launch of "Journey Mobile Version" in 2016, the iOS best-selling game ranking has continued to decline, from 6th to 170 in January 2023; The "Journey 2" mobile game launched in 2018 and the "Green Journey" mobile game launched in 2019 ranked only 59th and 70th in the first month of the best-selling list, which was basically close to the "Journey Mobile Version" in the same period, and did not reach a new high, as of January 2023, the best-selling list of iOS games ranked 133/188 respectively.
Zhao Jianfeng, the person in charge of the Journey IP track, the performance of the Journey series of mobile games is mainly due to: on the one hand, the resources of the Journey team are scattered, and after the "Journey" end tour, different products have been under the responsibility of different project teams for a long time, and the understanding of Journey IP is not uniform; On the other hand, the gameplay did not meet the rapidly changing needs of players, and the development of Journey IP was inspired by planners and producers, and the team did not communicate well with players.
2.2 Ball Series: Successfully expanded the leisure category, stable turnover scale In 2015, the casual competitive mobile game "Ball Wars" was launched, which has the characteristics of simple to use, rich gameplay, strong social attributes, and high user stickiness, and is still contributing to the company's continuous and stable income, which is another core flow contribution after "Journey". The entry threshold is low, and the gameplay is rich and diverse. As a casual competitive mobile game, the classic gameplay of "Ball Wars" is to eat big balls and eat small balls, which is simple to get started, and the duration of each game does not exceed 15 minutes, which is very friendly to new users and conducive to new user retention.
At the same time, the gameplay of "Ball Wars" is diverse and deep, with the characteristics of "easy to get started and difficult to master", the company continues to innovate the gameplay and launch differentiated content, which is conducive to the long-term retention of old users. Strong social attributes, promote sharing and spread. In "Ball Wars", players can not only team up to play, but also follow each other, watch battles, take selfies and upload selfies, etc., to gain a sense of identity and belonging, strengthening the social nature of the game. In addition to vigorously developing online social networking, the company continues to further enrich users' social experience by organizing offline events, concerts, ball bag clubs, etc.
The strong social nature makes the rapid spread between game users and potential users, and the number of users continues to grow. Frequent version updates, active users still growing. The company updates the game content frequently, and releases an operational version at least once a week; Release the R&D version at least once a month; Major nodes such as winter and summer vacations release large-scale expansion packs. The number of Ball Wars version updates has been at a high level compared to other games, driving user growth, with the game increasing its average daily active users year-over-year throughout 2021 and a 29% year-over-year increase in the second half of the year.
Hold e-sports events and cross-border events to keep players active.
1) In terms of e-sports events, "Ball Wars" provides competitive functions such as rank and season settlement, providing the possibility for the game to exert its power in the field of e-sports. In 2017, it successfully held online opens, professional leagues (spring tournaments), Tatan Cup Elite Challenge and other events, and in 2018 it had 50,000 registered esports players.
2) In terms of cross-border linkage, in 2020, "Ball Ball Masterpiece" crossed multiple commercial fields, and carried out diversified cooperation with "Transformers", "Angry Birds", Meituan, KFC, Big Mouth Monkey, etc., and jointly created a DJ party on the ball ball online with well-known musicians Yang Hesu and Xu Mengyuan, and launched the "Million Pairs of Sneakers Live Delivery" activity, with the average daily new users, daily average returning users, and daily active users of the game increasing by more than 20% compared with before the event. By breaking through online and offline barriers in the fields of games, live broadcasts, and events, the company makes cross-border connections in various fields, integrates and symbiotics, and forms a cross-platform and multi-scenario interactive experience. In terms of recent promotional activities, 2023 Game invited Yang Chao to be the brand spokesperson and cooperate with Douyu to launch the second Douyu Cup event.
3. New Tour: "Journey" improves and returns, expanding the party and placement categories
3.1 "Original Journey": Produced by Shi Yuzhu himself, optimized compared with the previous work "Original Journey" is not the first "Journey" series of mobile games, compared with the previous Journey series of mobile games, "Original Journey" has greatly improved the production team, gameplay, picture quality, numerical system and other aspects.
Specifically, "Original Journey" has the following improvements over the previous "Journey" series of mobile games
Journey IP The first new product in the past three years, Shi Yuzhu personally supervised. "Original Journey" is the company's core and good at national war MMORPG track game, and it is also the first new product of the classic IP "Journey" in the past three years, created by a generation of original team members. Shi Yuzhu, the first generation producer of Zhengtu, personally supervised the production and proposed more than 400 revisions.
Restore the core gameplay of Journey, and add new gameplay. The game is a new product of the "Journey" IP, which restores "Journey" in production and high-definition reset on art expression; In addition, the game has also been improved in many aspects such as technical performance and gameplay details, using "dynamic AI algorithms" to balance the PK happiness of different players, and has been optimized in lightweight design to meet the different game needs of heavy and light players.
Rebalance the numerical system to focus on the experience of small and medium-sized players. Due to historical reasons and numerical problems, the original "Journey" end-game has the problem of super RMB players being too powerful, and Shi Yuzhu's suggestion in Weibo shows that "Original Journey" will establish an open economic system to further balance the relationship between RMB players and non-RMB players, so that small and medium-sized players can get more experience.
Server architecture upgrade, single zone can host 100,000 people. On December 15, 2022, the final test of "Original Journey" exceeded 100,000 people in a single area, meeting Shi Yuzhu's requirement to change the server architecture back to the multi-server architecture of the earlier journey, increasing the number of people per district by 5-10 times. For Kingdom War MMO games, gameplay is related to the number of people, and the more players in a single zone, the more fun. Different servers can be connected, there will be a larger geographical architecture, users can get bigger worlds, more people and more opponents.
Brand marketing and purchase volume to improve publicity volume. The company has shown a strong willingness to market and promote its core IP and products, on the one hand, Shi Yuzhu personally visited the player meeting, and also invited Gao Ye, the actor of the recently popular drama "Crazy", as the brand spokesperson.
The ranking of "Original Journey" has steadily improved, and it is optimistic about long-term operation. According to Qimai data, the iOS best-selling ranking on the first day of the game's launch was 18th, and as of April 6, the ranking has steadily increased to 13th, optimistic about the long-term operation performance of the game.
3.2 "Space Action" (Super Sus): A game with strong social attributes, taking the first step in self-research and going to sea "Space Action" is a party-type space werewolf killer game. In terms of social attributes, "Space Action" and "Egg Party" and "Ball Wars" Although the gameplay is different, they all have strong social attributes through party settings and communication settings, and the style of the game is cute; In terms of game type, "Space Action" and "Goose Duck Kill" are both casual werewolf killing games, and the general gameplay is to kill other lineup players with their own skills, complete missions, or analyze/mislead opponents of other camps in meetings, but there are differences in specific art styles, camp settings, and gameplay details. Based on the above similar characteristics, we believe that the game is expected to refer to the above games in terms of user growth, turnover contribution, and dissemination speed, specifically:
User growth: Simple to get started, strong social attributes, is expected to obtain a large number of users through social sharing. As a space werewolf killer game, Space Movement divides all players into three factions, and needs to use strategy to make correct inferences to distinguish people from other camps, and in the process needs to communicate with different players and have strong social attributes. Strong social attributes dictate that once they start social sharing, players are expected to increase rapidly. For example, NetEase's "Egg Party" was launched in May 22, which also has strong social attributes, and the number of parties increased rapidly during the Spring Festival, and the number of users increased exponentially, and DAU exceeded 30 million.
Turnover contribution: After DAU reaches a certain magnitude, payment will be gradually started, and long-term operation is expected. Also a casual party game with strong social attributes, the turnover growth curve of "Operation Sky" is expected to refer to "Egg Party", "Egg Party" after more than half a year of user accumulation, after the DAU reached a certain magnitude, the game's payment points increased, and the turnover began to rise rapidly at the end of 2022. At the same time, the company has the experience of successfully operating "Ball Ball Operation" through a similar model, and "Ball Ball Operation" can still contribute stable revenue to the company seven years after its launch, and "Space Action" is expected to become the second "Ball Ball Operation".
Word of mouth and marketing: Referring to "Goose and Duck Kill", "Space Action" is expected to break the circle through live broadcast effects. "Space Action" and the popular "Goose and Duck Kill" in January have certain similarities in game types and gameplay, the explosion of "Goose Duck Kill" has allowed more people to understand werewolf killing games, or laid a certain foundation for the announcement of "Space Action", "Space Action" was officially launched on January 16, and the number of new registered users on both ends exceeded 1 million on the first day. At the same time, compared with "Goose Duck Kill", which only supports the Steam platform in China, "Space Action" has higher convenience.
At present, the number of anchors who broadcast "Goose and Duck Kill" live on major platforms has decreased, and as a similar game, "Space Action" is expected to become a new favorite of anchors and spread rapidly through the live broadcast effect. Excellent overseas performance, taking the first step of self-developed games overseas. Super Sus started testing in Southeast Asia in November 2021, and based on its innovative game experience, distinctive European and American cartoon style and ultra-high degree of freedom gameplay, Super Sus has been well received by players once logged in, and has long ranked in the top three free and popular Google Play lists in Indonesia, Thailand, Malaysia and other regions. By the beginning of 2022, the number of registrations exceeded 10 million, and the average daily active users reached one million. "Super Sus" has also set off a boom on YouTube, TikTok and other overseas streaming platforms, with nearly 100 million video views, a large number of players and KOLs expressed their love for the game in the way of UGC, at present, the international version of Taptap has a score of 8.5; Google Play has more than 10 million downloads, a rating of 4.4, and the overseas version has started to pay.
3.3 "Dragon and the End of the World": The well-known producer is responsible for opening up the idle track "The End of the World and the World" is a 3D idle mobile game based on Japanese retro cartoon art style, with a grand world view and MMORPG visual experience, and its leader Liu Yifeng has released games such as "Endless Urala" and "The Way of the Immortals", and has more than 7 years of experience in idle games. "Dragon and the End of the World" has started overseas testing in January 2022, launched in Taiwan on March 16, has obtained a version number, and is expected to be launched in mainland China in the first half of the year, with 166,000 TapTap reservations and a rating of 7.5.
4. AI: The company is actively embracing new technologies, and casual games are expected to be the first to be adopted
The founder is optimistic about AIGC+ game applications and actively cooperates with Baidu Wenxin. On March 28, 2023, the company said on the investor interactive platform that the company is optimistic about the benefits of AIGC-related technologies to the transformation of game content production mode and efficiency improvement, and has been actively promoting the application of related tools in game NPC, concept art design, gameplay design, game marketing and other business scenarios, and will continue to increase investment in "game + AI" in the future. According to Shell Finance, founder Shi Yuzhu mentioned in an internal conversation that game + AI is the general trend, and the company must focus on the layout in the future, AI has gradually entered the practical stage, and artificial intelligence is easier to play in the field of games. We believe that AIGC is expected to have a positive impact on the company's game asset generation, numerical curation, and game operations. 1) Game asset generation: lightweight games quickly benefit, and games under research reduce costs and increase efficiency.
The company cooperated with Baidu to generate mobile game images by AI, and the derivative identity set has been launched. On March 24, the company announced that its "Space Action" and Baidu Wenxin Yiyan jointly launched the first mobile game image "Space Shark" generated by domestic AI, the company is responsible for the overall planning of the image, in-game development and application, etc., Baidu Wenxin big model team is responsible for the AI training, generation and deep optimization of the image, "Space Shark" with its cute and cute shark image, extremely fit the party social attributes of "Space Action" and the deep-sea map scene in the mobile game. On March 31, the identity set derived from the image was launched in Space Ops. We believe that on March 16, Wen Xin Yiyan was released, 8 days later the company released the space shark generated by Wen Xin's word, and 17 days later the space shark launched "Space Action", and in a short period of time, from image generation to online game landing.
On the one hand, it proves the company's determination and efficient landing ability to apply AIGC, and on the other hand, it is conducive to the company's cost-effective and cost-effective increase of map background, skin, and dress up content in lightweight games such as "Operation Sky" and "Ball Wars". Lightweight games can use AI-generated in-game assets in a timely manner through rapid version updates, reducing update costs; Games under development are expected to reduce repetitive labor and improve development efficiency through generative AI.
Generative AI enriches UGC content. "Space Action" is committed to creating a global UGC platform, encouraging players to create independently, its original "script workshop" mode provides a high degree of UGC freedom, players can independently create exclusive maps, scenes, party gameplay, etc., and invite friends to experience together, this mode has attracted many players to use creativity in the game, carry out independent creation, and has accumulated more than 200,000 players to create their own scripts. Through generative AI, players are expected to further diversify the content created in Space Ops, which can create more gameplay, identity skills, skins, etc., and is expected to further simplify the player creation process, attract more players to join the creation, and improve the quality and quantity of player-created content in the game
2) Game numerical planning: With long-term user data accumulation, AI can quickly find the best value, which is expected to further solve the long-term numerical imbalance problem of National War MMORPG games. For example, due to historical reasons and numerical problems, the problem of super RMB players being too powerful has appeared, and the numerical balance problem directly affects the player's game experience, and the use of AI to learn the player behavior data accumulated by the company in the National War MMORPG games for a long time can quickly find the best numerical design or numerical update direction for games under research or similar games that have been launched.
3) Game operation: Accurately classify players and take personalized measures to reduce player churn. AI can divide players into hundreds or even thousands of categories according to player behavior data, and different measures can be taken for different types of players through AI-generated player tags, such as issuing a certain amount of unfrozen virtual currency to players whose online time has been significantly reduced and have been recharging less, and even designing and matching different values for different types of players, so that each player can achieve the most comfortable and least likely to lose game experience.
5. Financial analysis: the old game has a stable profit, and the company has strong profitability due to high R&D investment in the past 3 years.
In the past three years, the company's net profit after deduction of non-attributable parent has grown steadily. In the past five years, the company's net profit rate attributable to parents and net profit margin deducted from non-attributable parents has basically been above 30%, of which it will rise to more than 40% in 2020-2021, higher than about 30% of Gigabit and about 20% of Sanqi Interactive Entertainment.
The company's gross profit margin is at a high level in the industry. From 2017 to 2018, the proportion of other-Wangjin financial business revenue increased, but the gross profit margin was less than 60%, resulting in the company's overall gross profit margin being around 75%; Since 2019, after excluding the Wangjin financial business, the company's gross profit margin has recovered to around 85%, mainly due to the high gross profit margin of mobile game and terminal game business with the highest proportion of revenue, basically in the range of 85%-90%. According to the inquiry letter of the 2019 annual report, from 2018 to 2019, the average gross profit margins of the company's five main games, namely "Journey" end game, "Journey 2" end game, "Journey" mobile game, "Journey 2" mobile game, and "Ball Wars", were 88.30% and 90.26% respectively.
The operating costs of the company's game business are mainly server hosting fees, server depreciation expenses, game copyright party share, operation and maintenance and customer service personnel costs. We believe that the gross margin of the company's game business is leading in the industry, mainly due to:
1) The core game operation investment demand is small and the investment is low. For the Journey series, each product has a long operating time, basically enters a mature period, the core players have strong stickiness, the number is stable, and the effect of users of version updates is weak, so we believe that the demand for version updates in this series of games is low; For "Ball Wars", because it is a social game, the game's play fun mainly comes from players, so the iteration requirements for the version of the game itself are lower than MMOs and other types. In addition, the optimization of game server resource allocation also reduces the cost of server hosting fees, server depreciation fees and so on.
2) The proportion of self-developed games is high, and the copyright share is small. Taking Kunlun Wanwei as an example, among its top five games by revenue, the proportion of agency games in game business revenue increased from 37.5% in 2019 to 50.6%, and self-developed games dropped to 21.7%, making the gross profit margin of the company's game business drop from 55.3% to 42.4% in 2021. Since the core product line of Giant Network Journey Series and "Ball Wars" are self-developed games, they are original IPs, and the copyright sharing and licensing fees are less, so the gross profit margin of the game is significantly higher than that of Kunlun Wanwei of nearly 30pct.
3) Marketing expenses are included in sales expenses. Taking Youzu Network as an example, according to the company's announcement, it included marketing fees in operating costs, while Giant Network included the promotion fees of mobile games in sales expenses, making the gross profit margin of Giant Network higher than that of Youzu Network. The company's expense ratio during the period was at the upper middle level among domestic game companies. In the past five years, the company's expense ratio has continued to rise, from 37% in 2017 to 61% in 2021
The selling expense ratio is among the middle in the industry, and advertising expenses have been reduced in the past three years. In the first three quarters of 2017-2022, the company's sales expense ratio remained at the middle level in the industry, lower than Sanqi Interactive Entertainment and Gigabit, and higher than Youzu Network. In the past five years, the expense ratio has increased slightly, from 12% to 19%, but the scale of sales expenses has shown a trend of reduction, because after the launch of the "Journey 2" mobile game in 2018, the company's unfocused games were launched, and the advertising expenses narrowed to 210 million yuan. It is expected that with the launch of new games such as "Original Journey", the company's advertising expenses may increase significantly. In 2021, channel fees increased by 49% to $140 million, and commissions charged by some game platforms increased.
The management expense ratio is at the middle and upper level of the industry and is relatively stable. In 2018, the company's management expense ratio increased by 8pct year-on-year to 16%, which was due to the increase in employee compensation and other expenses generated by the merger of Wangjin Finance. After the release of Wangjin Financial, from 2019 to the first three quarters of 22, the management expense ratio recovered to around 10%, which is at the upper middle level among game companies. In the past five years, it has achieved net financial income. In the first three quarters of 2017-2022, the company's financial expense ratio was negative, mainly from interest income, and the expense ratio increased from -4% to -1% in 2021, and -1% in the first three quarters of 22. Other game companies are mostly net financial expenses.
The R&D expense ratio is high in the industry, and the investment in reserve games is large. Since 2019, the scale of the company's R&D expenses has decreased from 810 million yuan to 720 million yuan in 2020, and reached 710 million yuan in 2021, basically flat, but the R&D expense rate has gradually increased to 35%, significantly higher than Perfect World, 37 Interactive Entertainment, etc., mainly Since 2019, the company has carried out R&D model reform, through the "track system + large middle platform small projects" model, to improve product innovation capabilities and R&D efficiency, thereby adjusting the allocation and intensity of R&D resources in manpower and projects.
Optimize personnel structure and increase R&D incentives: Since 2019, the company has continued to streamline R&D personnel, the total number of R&D personnel has decreased from 1537 to 998 in 2021, and the company has introduced high-end talents as heads of various business lines, of which the number of people under 30 years old in 2021 increased by 16% year-on-year to 441. In addition, the per capita salary of R&D continued to increase, from 435,000 yuan to 594,000 yuan, improving the incentive effect.
Concentrate more resources on ongoing projects. The company sold Hefei Lingxi, which is engaged in chess and card online games, and concentrated its R&D resources on key tracks such as Journey IP, Qiuqiu IP, Pan-quadratic, and Placement, while extending the R&D cycle to polish the quality of games. We believe that with the launch of reserve products in 2023, the company's R&D expense ratio is expected to decline in the short term.
6. Profit forecast We forecast the company's revenue in the next three years from three aspects: mobile game, terminal game and other businesses.
1) Mobile games:
Old games: Although the company's old games have entered a mature period, but the flow of long-term operation is relatively stable, the decline is small, we expect that the revenue of the company's launched mobile games will be 992 million / 952 million / 912 million yuan in 2022-2024, a year-on-year change of -8.79% / -4.02% / -4.22% respectively.
New games: The company will have three games online in 23 years, of which "Super Sus" has been launched in January, "Original Journey" is set for March 24, "Dragons and World's Ends" has received a version number, the three new games are expected to bring a significant revenue boost to the company in 23 and 24, and considering that the three games in 24 have contributed to the whole year and may launch new products, the revenue growth in 24 years is even greater, we estimate that the company's newbie tour revenue in 2023-2024 is 10.23 1.447 billion yuan. 2) In terms of end-tour:
The company has no plans to launch new end games in the near future, both end games have also entered a mature period, and the turnover has declined slightly, we expect that the revenue of the company's online end games will be 817 million / 771 million / 731 million yuan in 2022-2024, a year-on-year change of -7.00%/-5.58%/-5.24% respectively. 3) Other business aspects:
The company's other business income mainly includes Internet community tool revenue, other game-related business income, etc., the company's other business has a good growth trend in recent years, we expect the company's other business revenue in 2022-2024 to be 218 million / 314 million / 372 million yuan, a year-on-year change of 37.32%/44.24%/18.44% respectively. In summary, the company expects to achieve revenue of 2.026 billion / 3.060 billion / 3.562 billion yuan in 2022-2024, a year-on-year change of -4.61% / 51.01% / 16.39% respectively.
Gross margin, expense ratio and net profit forecast:
1) Operating cost and gross margin: the company's costs mainly include server hosting fees, server depreciation expenses, operation and maintenance and customer service personnel costs, the overall fluctuation is small, we expect the company's gross profit margin to be 77.39% / 80.67% / 80.99% in 2022-2024;
2) Period expense ratio: Since the company will have three new tours online this year, the publicity expenses will increase that year, and the sales expense ratio is expected to be 18.12%/20.79%/17.04% in 2022-2024, respectively, and the expense ratio in other periods is basically stable, with the estimated R&D expense ratio of 32.54%/32.50%/32.87%, the management expense ratio of 9.91%/9.00%/9.00%, and the financial expense ratio of -2.03%/- 1.77%/-1.76%；
3) Net profit attributable to parents: Based on the above forecast, it is expected that the company will achieve a net profit attributable to owners of 912 million/1.150 billion/1.399 billion yuan in 2022-2024, a year-on-year change of -8.30%/26.12%/21.62%, respectively.
Investment Advice:
The company's old games have steadily contributed revenue and profit, and the three new games launched this year will gradually contribute to the increase in performance, coupled with the company's active embrace of AI technology, which is expected to reduce production costs, optimize the numerical system, strengthen player operations, and improve the company's profitability in the long run. We expect the company to achieve a net profit attributable to the parent of 912 million/1.150 billion/1.399 billion in 2022-2024, a year-on-year change of -8.30%/26.12%/21.62%, respectively, and the PE corresponding to the current market value is 32.6x, 25.9x, and 21.3x, respectively.
Risk Warning:
the risk of a decline in industry prosperity; the risk of declining turnover of existing games; the risk of reducing the total number of game users; the risk of operational errors in key projects; the risk of delays in the launch of new games; the risk that the new game will not perform as expected after it is launched; Promote marketing ROI to reduce risk; the risk of rising marketing volume costs; the risk that the unobtained version of the game version will not be obtained as expected; content regulatory risks in the gaming industry; The industry is highly competitive; the risk of rising labor costs; risk of attrition of core talent; the risk that exchange rate fluctuations will affect net profit; the risk that fluctuations in investment income will affect net profit; the risk of shifting player preferences; the risk of continued macroeconomic pressures; the risk that generative AI technologies will not evolve as expected; The risk that generative AI is not applied as expected in the gaming industry.
We expect the company to achieve revenue of 2.026 billion / 3.060 billion / 3.562 billion yuan in 2022-2024, of which the revenue of the company's newbie tour in 2023-2024 is 1.023 billion / 1.447 billion yuan, if the company's newbie tour turnover is not as expected, it will affect the company's revenue and profit. In this case, assuming that the company's revenue from the new tour in 2023-2024 is 923 million / 1.247 billion yuan, the company's revenue will decline to 2.026 billion / 2.960 billion / 3.362 billion yuan in 2022-2024, and the net profit attributable to the parent will decrease by 912 million / 1.050 billion / 1.199 billion.
——————————————————
The report belongs to the original author and is for learning only! If there is any infringement, please delete it by private message, thank you!
Report from [Foresight Think Tank]