Research Report


趙明志先生(Kevin Chiu)


Kevin Chiu received Bachelor`s Degree from University of Bristol and obtained Master`s Degree with distinction in Accounting and Finance from Warwick Business School. Kevin once worked as an analyst in the Equity Capital Market department of China Securities International, and he is familiar with the operation of Hong Kong`s capital market. Kevin is currently a licensed research analyst at Phillip Securities and covers TMT / Education sectors.

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XD Inc (2400.HK) - Steady Game Revenue Growth, TapTap MAUs Growth Beats Expectation

Friday, September 25, 2020 Views3942
XD Inc(2400)
Recommendation on  25 September 2020
Recommendation Accumulate
Price on Recommendation Date $39.850
Target Price $43.250

Investment Summary

1H20 interim result overview

The 1H20 Revenue of XD Inc. was RMB 1.44 billion (+10.0% yoy). The revenue contributed by game operating business was RMB 1.19 billion (+8.1% yoy). Within the game operating business, the revenue of online game operating business was RMB 1.11 billion (+3.8% yoy). The rise was mainly attributed to the solid performance of Sausage Man (香腸派對) in 1H20. But the solid performance of Sausage Man (香腸派對) was partly offset by decreases of revenue from games under maturity stage, such as Ragnarok M (仙境傳說). In addition, the revenue contributed by premium game operation was RMB 50.5 million (+98.4% yoy), mainly attributed by the solid performance of new game Juicy Realm (惡果之地) and old game Muse Dash (喵斯快跑). On the other hand, the company's revenue from information services in 1H20 was RMB 252 million (+19.9% yoy), and contributed 17.6% of the company's total revenue. The yoy increase was mainly attributed by the huge increase in MAUs of TapTap platform in 1H20. As affected by the quarantine, the MAUs of TapTap platform in 1H20 was 24.8 million (+51.9% yoy).

The company's GP in 1H20 was RMB 826 million (-5.9% yoy), with GPM at 57.3% (-9.7ppt yoy). The GPM of game business in 1H20 was 51.3% (-11.3ppt yoy). The decrease was mainly attributed by the fact that the contribution from game operating revenue recognized on a gross basis to total game operating revenue has increased from 49.2% to 73.1%. On the other hand, The GPM of information services in 1H20 was 85.5% (-4.2ppt yoy). The decrease was mainly attributed by the fact the increase in cost as a result of TapTap MAUs increase was higher than the corresponding revenue increase. The Adjusted NP attributed to parent in 1H20 was RMB 207 million (-12.7% yoy)

The growth of MAUs on TapTap platform in 1H20 higher than our expectation, the number of game downloads in 1H20 has also increased significantly

The MAUs of TapTap platform in 1H20 was 24.8 million (+51.9% yoy). The huge increase was mainly attributed by 1) the improving exclusive content on TapTap platform 2) the increasing time spent online by netizens during the quarantine 1H20. The company has launched many exclusive contents on TapTap in 1H20, including “Pasical's Wager” (帕斯卡契約), which is a Chinese game appeared at the Apple Conference. In July 2020, TapTap also exclusively released a free-to-play game “Canal Towns” (江南百景圖) on PRC Android platform. The game has more than 5 million downloads on the platform in the first month since launched. We believe “Canal Towns” (江南百景圖) will be served as a great Case study for TapTap platform and help attract more exclusive distribution rights of third party quality games for TapTap platform. With the increase of more high quality content on the platform, the MAUs and advertisement revenue of TapTap will also likely to rise. The number of downloads and TapTap posts in 1H20 also increased by 26.4%/143.0% yoy. The number of TapTap posts grew faster than the MAUs` growth, which indicates that the degree of user participation of users from TapTap has also increased in 1H20. In 2H20, it is expected that the user accounts of Sausage Man (香腸派對) will be connected with the TapTap accounts. The user accounts of Human Fall Flat (人類跌落夢境), a highly anticipated game planned to be issued in 2H20, will also be connected with the TapTap accounts. We strongly believe this will further increase the degree of user participations of TapTap Platform.

Despite the huge increase in TapTap MAUs in 1H20, the ARPU of TapTap platform has decreased significantly, from RMB 12.9/ 6 months in 1H19 dropped to RMB 10.2/ 6 months, down by 21% yoy. The drop was mainly attributed by 1) the desire to advertise from the small/mid-tier advertising company has dropped significant in 1H20, since there weren`t much new games issued in 1H20 2) the increase in MAUs in 1H20 was mainly driven by the addition of new users, and the advertisement placing accuracy of TapTap on new users was relatively lower than old users. Hence, dragging down the overall ARPU. With the increase of supply of new games on TapTap in 2H20 as well as the gradual improvement of advertisement placing accuracy of TapTap on new users, we believe that the new users on TapTap will bring significant commercial value to the company in the long term, and ARPU is also expected to recover.

In August 2020, the company has further acquired YiWan's 18.34% shares and reached 74.12% totally. The company has spent a total of RMB 330 million in this acquisition. After the acquisition, the company is expected to further enhance its synergies with TapTap platform.

Steady Growth in online game's revenue, the company is expected to launch 3 self-developed games in the next year

The company's online game operating revenue in 1H20 was RMB 1.11 billion (+3.8% yoy). Despite the impressive performance of Ulala (不休的烏拉拉), Sausage Man (香腸派對) and Lan Yan Qing Meng (藍顏清夢) in 1H20, the growth of online game operating revenue was still rather slow. It was mainly because Ragnarok M (仙境傳說), the game that contributed the most revenue in 2019, is already under its maturity stage, hence a significant drop in revenue of the game. It is expected the company will launch a huge update version of the game in 2H20, which is likely to extend the life cycle and revenue contribution of the game. In order to increase R&D capabilities, the company has expanded their R&D team in 1H20, by adding 618 R&D employees comparing to 1H19.Among them, 250 employees are mainly focusing on game development. Currently, there are 11 games are under development by the company, 3 of them are expected to be launching in 1H21, including ARPG game Torchlight: Infinity(火炬之光:無限), simulation game Fantasy World (心動小鎮) (previously name as 創想世界) and MMORPG game Project A (tentative name). Project A was developed by Ragnarok M (仙境傳說)'s development team and is the company's largest game since Ragnarok M (仙境傳說) in terms of capital investment. We are expecting an impressive performance of the game after it is launched.


After considering 1) the revenue growth of online game operating business is slower than expected 2) the revenue growth of premium game operating business is higher than expected 3) the GPM of the company is lower than expectation 4) the R&D expenses increase as a result of the expansion of R&D team 5) the S&M expense ratio of 1H20 is lower than expectation 6) the decrease in minority interest as a result of the increase in Yiwan's stake, we have lowered the company's 2020/2021/2022 Adjusted EPS to RMB 1.04/1.50/2.19. By considering that long term commercial value brought by the huge increase in MAUs of TapTap platform, we have raised the company's target 2021 PE ratio to 26x. We have raised the target price to HKD 43.25 (+5%), with corresponding 2020/2021 adjusted P/E ratio of 37.6x/26.0x. We upgrade the rating to “Accumulate”.


1) The tightening on Game regulations 2) The Games underperform comparing to expectation 3) The MAUs growth of TapTap platform is less than expectation

Financial Statements

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