\u3000\u3 China Vanke Co.Ltd(000002) 555 Wuhu 37 Interactive Entertainment Network Technology Group Co.Ltd(002555) )
Events
On April 11, the edition Department released a new batch of game edition numbers. Since the last batch of edition numbers were issued in July last year, the edition numbers have stagnated for nearly nine months. The company’s dream voyage has been approved.
Key investment points
After the version number is restarted, the sales expense rate may decrease, and the duration may reach 18 months
According to the experience of the previous round of version number restart, after this round of version number restart, the monthly average number of version numbers will remain low, the sales expense rate will enter a downward cycle of about 18 months, and the ROI of advertising will rise. We believe that after this round of restart, the monthly average number of editions will remain low. The main reasons include: 1. From the historical data, in the 17 years before the suspension of the previous round of edition numbers, the average monthly number of edition numbers was about 700. In about two years after the restart of the previous round of edition numbers, the average monthly number of edition numbers was only about 100, and the number decreased significantly. 2. In recent years, a number of new restrictive regulations have been issued, and the regulators have put forward more strict audit standards for game content: for example, in August 19, the Publishing Bureau of the Central Propaganda Department indicated that the themes of gambling and official fighting should be strictly controlled; In September of the 21st century, the United States and society criticized the non-compliance of human beings. 3. From the version numbers issued, the quantity has been significantly reduced. The number of edition numbers distributed in this round is 45, which is significantly lower than the average level before the first edition number is stopped and after the first edition number is restarted. Therefore, it can be predicted that the number of version numbers issued in the future may be low for a long time. As the number of newly issued version numbers continues to remain low, once a company obtains a version number, it will obtain a high ROI in purchase volume and marketing, driving the company’s marketing expense rate down, and the dividend period is about 18 months. 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. Our conclusion can be confirmed by our reply to the sales expense rate of the company after reopening the edition in January 19. The company’s sales expense rate peaked in 18q4 and was in a shock downward stage in the following seven quarters, reaching a new high only in 21q1.
To sum up, we believe that after the restart of the version number, the company’s sales expense rate will enter a downward cycle of about 18 months. According to our prediction, the marketing expense rate of the company in 22-23 years will decrease by 0.5/0.4pct respectively compared with that in 21 years.
After the version number is restarted, the R & D expense rate may enter a downward cycle, which may last up to three years
We believe that the R & D expense rate of the company will be in a downward stage in the future, and this downward stage may be up to three years. The company’s R & D expense rate will be in a downward stage in the future, which is caused by the clearing of the talent supply side caused by the contraction of the industry under strong supervision. Since the release of the version number was suspended in July, 21, with the further tightening of the regulation on the game industry, and the downward fundamentals of platform companies under the supervision of the Internet, a large number of platform companies have abolished the game business. In addition, there are no new entrants in the industry, which has led to the sharp liquidation of the supply side of the industry. For example, Baidu announced the end of 21 by the end of the game business, B station game Department layoffs 20%, most of the staff of Iqiyi game center was cut, Kwai game division layoffs, bytes, light game team layoffs and so on. We judge that the talent supply side of the game industry has been cleared.
At the same time, we believe that the downward cycle of practitioners’ compensation will be very long. On the one hand, from the supply side, the “prisoner’s dilemma” of maintaining existing talents among leading enterprises will lead to a very slow downward speed. Specifically, major companies such as Tencent and Netease will not significantly reduce their salaries in the short term to prevent talents from flowing to other companies. However, the long-term oversupply will still lead to the decline of employment costs. For example, Tencent has also put forward the slogan of “reducing cost and increasing efficiency” at the company wide level this year. On the other hand, from the demand side, it is difficult to see the inflection point of demand reversal. The rise of VR / AR, metauniverse and other industries may lead to the reversal of talent demand, but they all take a very long time. Considering the above two points, we believe that the R & D expense rate of the company will continue to decline in 22-23 years. According to our prediction, the R & D expense rate of the company in 22-23 years will decrease by 0.4/0.8pct respectively compared with that in 21 years.
The company’s overseas issuance business has established high barriers and is underestimated by the market, and the overseas business will maintain a high growth. We believe that the barriers of issuance companies with global issuance capacity are seriously underestimated by the market. The reason why the market underestimates barriers comes from the relatively low barriers in China’s distribution industry. The market has witnessed a large number of companies that are good at distribution and have been quickly and successfully imitated, such as China Mobile Games. It has also witnessed the success of a large number of self built distribution businesses of R & D companies, such as Lilith.
But in fact, the barrier of global distribution is much higher than that of Chinese distribution. First, most companies cannot establish a complete overseas distribution team, especially for the small language market, the ROI is too low. For example, the mobile game market in Thailand has a scale of only US $500 million a year. If the self built distribution team covers the Thai market, it is often unable to return the capital. Only publishers with a large number of games can achieve positive revenue. At present, the company’s overseas issuance business has covered more than 200 countries and has established a relatively complete overseas issuance team. Second, companies with global distribution capacity will be much stronger than companies with specific regional distribution capacity in upstream project competition. Before this round of edition number supervision, when the game company was established, it was mainly aimed at the Chinese market, and the income of overseas markets was only icing on the cake. However, after the supervision, game companies aim at the global market at the beginning of the project. At this time, companies with global distribution capacity will be much stronger than companies with distribution capacity in specific regions, because game developers also hope to solve the problem of global distribution in one stop. The company has high barrier global distribution capacity. For example, the company’s overseas masterpiece “Puzzles & survival” has entered the top 100 IOS best sellers in North America, Europe, Australia, the Middle East, Japan and other markets. To sum up, the global distribution capacity has promoted the company to form a positive cycle of “strong distribution – good projects – stronger distribution”, and the success of Puzzles & survival is expected to continue.
We believe that the company’s overseas issuance business has strong barriers and is underestimated by the market, and the growth rate of overseas business will maintain a high growth rate in the future. According to our prediction, the growth rate of the company’s overseas business revenue in 22-23 years will reach 52.7% and 33.1%.
Investment advice
We expect the company to achieve revenue of 17.6 billion yuan / 20.2 billion yuan / 23.9 billion yuan in 21-23 years, with a year-on-year increase of 22.1% / 15.0% / 18.0%; The net profit attributable to the parent company was RMB 2.83/33.5/4.11 billion, with a year-on-year increase of 2.33% / 18.5% / 22.8%. The corresponding P / E of the current stock price is 16.4/13.8/11.3 times. 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. 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 83.7 billion yuan and a corresponding share price of 37.7 yuan. Compared with the current price, there is 72.2% room for “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; Risk of failure of potential popular products, etc.
