Investor Notes - Phillip Securities (HK) Ltd

5 Sep, 2024 (Thursday)

XD INC(2400)
Analysis：
The State Administration of Press and Publication recently announced the approval information of 117 domestic online games in August, and the number of domestic game approvals in the month hit a new high within 2024. Additionally, according to the "July 2024 Monthly Report on China`s Game Industry" released by the Game Committee and Gamma Data, China`s game market revenue in July increased by 4.26% month-on-month but decreased by 2.83% year-on-year. Sales revenue of self-developed games in the overseas market increased by 5.3% year-on-year. With the continuous issuance of approvals driving the release of new game supplies, the deferred revenue from new games launched during the summer and the boost from "Black Myth: Wukong" in August, the game industry revenue growth is expected to reach an inflection point. In the first half of 2024, the company achieved operating revenue of 2.221 billion yuan, a year-on-year increase of 26.7%, with a net profit attributable to the parent company of 205 million yuan, a year-on-year increase of 127.4%. The gross profit for the first half of the year was 1.497 billion yuan, a year-on-year increase of 44.3%, with a gross profit margin of 67.4%, up 8.2 percentage points from the same period last year. In the first half of the year, the company`s sales/research and development expense ratios were 31.31% and 18.89% respectively, showing changes of +12.47% and -11.21% compared to the same period last year. The increased promotion and advertising expenses for the newly launched games "Let`s Go Muffin" and "Sword of Ruritan" as well as the marketing expenses for TapTap China Edition led to a significant increase in the sales expense ratio. The company`s game project restructuring and personnel optimization resulted in a decrease in the number of R&D personnel to 997. Additionally, a one-time stock option deduction for several former R&D personnel in the first half of the year significantly reduced R&D expenses.
Strategy：
Buy-in Price: $18.68, Target Price: $20.55, Cut Loss Price: $16.82

Report Review of August 2024

Sectors:

TMT, Semiconductors, Consumer & Healthcare （Eric Li）

This month I released reports of 361 DEGREES INT. (1361.HK).

During 2023FY, 361 Degrees International Limited (361 Degrees) recorded a revenue of RMB8,423.3mn, increasing 21.0% YoY. Profit attributable to the equity shareholders of the Company was RMB961mn, representing a YoY increase of 28.7%. A total dividend of HK20.4 cents per ordinary share (equivalent to RMB18.7 cents), representing a dividend payout ratio of 40.2%.

In terms of product segment, sales of the company's two core product lines, namely footwear and apparel, increased by 23.0% YoY and 9.8% YoY respectively. For the year under review, the proportions of total revenue of footwear and apparel sales were slightly increased from 41.0% to 41.7% YoY and slightly decreased from 35.2% to 31.9% YoY of the total revenue respectively. This was mainly due to the increase in proportion of sales revenue from 361 Degrees Kids from 20.7% to 23.2% of the total revenue for the year under review, which in turn affected the proportion of sales of various products to total revenue. The average wholesale price (AWP) of footwear and apparel edged up by 3.0% and 0.5% year-on-year respectively. The increase in footwear's and apparel's AWP was mainly due to the upward adjustments of the wholesale prices of the existing products across different product lines in order to cover the increase in cost of production and reflect the continuous brand image enhancement; the upgrade of product mix by launching a variety of new products with a higher AWP; and the increase in proportion of sales revenue generated from the e-commerce business which has a higher AWP than the sales made to distributors, above reasons contributed to increase in AWP as compared to that of last year. In addition, the sales volume of footwear and apparel products increased by 19.4% and 9.4% YoY, respectively.

In recent years, as China's consumer preferences leaned towards specialisation, diversification, and cost effectiveness, the company positions as a "professional, youthful, and internationalised" brand. The company has built a diversified brand matrix based on professional functions and its own-branded IP. With 2024 bringing numerous international and domestic sports events, including the highly anticipated Paris Olympics, which are expected to stimulate a broader participation in sports and increase consumer demand. We expect 2024-2025 EPS to be RMB0.49 and RMB0.53 respectively, with PT of HKD4.02, implies a FY2024E P/E of 7.47x (~2-yrs historical average). Our investment rating is “Accumulate”.

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