Key investment points
For the first heavy catalyst, the version number is restarted to start the downward cycle of sales expense rate
After the version number is restarted, the sales expense rate will enter a downward cycle of about 18 months. We can see that due to the suspension of the edition number, the number of new tours is small in the near future. Once a company obtains the edition number, it will obtain a higher ROI in purchase volume and marketing, driving the long-term decline of the company’s marketing expense rate. However, with the gradual release of edition numbers, more new games and more crowded tracks, this bonus will gradually disappear. Based on our past experience, this cycle is about 18 months.
The second heavy catalyst is cleared on the supply side to start the downward cycle of R & D cost rate
We believe that with the peak of industry space and the tightening of game management by regulators, a large number of platform companies have abolished the game business, which will lead to a significant liquidation of the supply side. With the clearing of the supply side, the remuneration of practitioners will decline for a long time, driving the leading R & D expense rate of the industry to enter a downward cycle of 3 years or more.
The third catalyst, the exploding hand Swim to the sea
Overseas market space is vast, and going to sea has entered a period of rapid growth. At present, there are mainly two successful models. The first is the “distribution model” with efficient distribution as the core barrier, such as Wuhu 37 Interactive Entertainment Network Technology Group Co.Ltd(002555) ; The second is the “R & D model” with high-quality R & D as the core barrier. Representatives such as Tencent and Netease are optimistic about Netease from the perspective of stock price elasticity.
Distribution mode: the core barrier is efficient distribution, represented by Wuhu 37 Interactive Entertainment Network Technology Group Co.Ltd(002555) . We believe that the barriers of issuing companies with global issuance capacity are seriously underestimated by the market. In fact, the barrier of global distribution is much higher than that of Chinese distribution. First, most companies cannot establish their own overseas distribution team, especially for the small language market, the ROI is too low. Second, companies with global distribution capacity will be much stronger than companies with specific regional distribution capacity in upstream project competition. For Wuhu 37 Interactive Entertainment Network Technology Group Co.Ltd(002555) , the success of Puzzles & survival is not only the embodiment of the strong distribution ability of Panax notoginseng (the distribution ability needs to be tested in the category selection link), but also further strengthens the distribution ability of Panax notoginseng (accumulating a lot of materials and algorithms). It is expected to become the absolute leader of the distribution mode.
R & D mode: the core barrier is high-quality R & D, represented by Tencent and NetEase. From the perspective of stock price elasticity, we are more optimistic about Netease. We believe that if game R & D is divided into two categories: creative production and industrial production, Tencent and Netease are already the top two companies in industrial production in the world. The industrial production barrier of games is very high. First, a large number of materials, codes and systems can be reused; Second, technological barriers are extremely high, and skills and knowledge are mainly reflected in team experience and running in degree, which is difficult to be imitated in a short time; Third, game technology is still developing rapidly, so Tencent and Netease are still evolving rapidly, so it is difficult for backward companies to catch up. For Netease, with its strong R & D ability as the starting point, it obtains a large number of high-quality IP and top partners, so as to further deepen the R & D ability of the game to the sea. In the environment of economic downturn, the company’s game flow is relatively stable, and the overseas version of Harry Potter and Diablo mobile games are expected to go online within the year, or further complete the transformation from the leader of Chinese games to the leader of global games.
Investment advice
Wuhu 37 Interactive Entertainment Network Technology Group Co.Ltd(002555) : we are optimistic about the company’s offshore business in the next two years, with a large-scale growth on the revenue side in 22-23 years. Sea going business has broad prospects and solid barriers. In the longer term, it may be able to rebuild a Panax notoginseng. According to our previous report, the company is expected to realize a net profit attributable to the parent company of RMB 3.33/3.74 billion in 22-23 years, corresponding to 16.1/14.3 times of P / E. Considering the performance driven by the restart of edition number and the undervaluation of overseas business barriers in the market, we may revise the 22-year profit forecast of 5% – 10% and the 23-year profit forecast of 10% – 15% (see the follow-up report for details). We valued the company at 25 times in 2022, corresponding to the target market value of 83.3 billion yuan, corresponding to the target price of 37.5 yuan, with an upward space of 55.6%, maintaining the “buy” rating.
Netease: we expect the company to realize a net profit attributable to the parent company of 20 / 246 / 29.6 billion yuan in the year of 22 / 23 / 24, with a year-on-year increase of 1.30% / 23.1% / 20.3%. The corresponding P / E of the current stock price is 20.0 / 16.2 / 13.5 times. We believe that the company’s performance this year is highly deterministic, mainly due to the high degree of certainty in the process of the overseas version of Harry Potter. In addition, it is also worth looking forward to the launch of “dark tour around the world”. We are optimistic about the company’s long-term competitiveness in overseas games and are expected to become the top two mobile game manufacturers in non China in 3-5 years. Considering the performance driven by the restart of edition number and the undervaluation of overseas business barriers in the market, we give the company a valuation of 25 times in 22 years, with a corresponding market value of 500.5 billion = HK $615.6 billion and a corresponding stock price of HK $178. There is 25.1% space compared with the current price, maintaining the “buy” rating.
Risk tips
The risk that the version number policy is lower than expected, such as the number of version numbers granted each year is lower than expected, and the limitation of version number category is lower than expected;
Geopolitics brings business risks to the sea, such as the game being taken off the shelf as a whole;
The most likely risk of failure of the expected potential popular products is that the user space of SLG products reaches the top.
