AP10 Launch And AI Integration Will Cut Costs

Key Takeaways

• Strategic AI integration in gaming and education is expected to reduce costs and improve net margins.
  
• International expansion through partnerships and new product launches aims to drive revenue growth and enhance earnings.
  
• Declines in education and gaming revenues amid AI transition challenges raise concerns about sustaining growth, despite improved profitability metrics.

Catalysts

Provides online and mobile games the People’s Republic of China, the United States, the United Kingdom, and internationally.

• The strategic shift towards AI integration in both gaming and education sectors is expected to cut costs significantly, which should positively impact net margins.
  
• Expansion into international markets via partnerships, such as with Wenge, leveraging AI and IP assets, is anticipated to drive revenue growth.
  
• The launch of ActivPanel 10 (AP10) with modular architecture allows for increased flexibility and deployment of additional services, potentially boosting revenue streams.
  
• Cost optimization efforts initiated in late 2024 are expected to fully materialize in 2025, contributing to improved earnings.
  
• The focus on shareholder returns through enhanced dividends and potential share buybacks is projected to influence EPS positively.

NetDragon Websoft Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NetDragon Websoft Holdings's revenue will decrease by 0.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.1% today to 14.2% in 3 years time.
• Analysts expect earnings to reach CN¥854.0 million (and earnings per share of CN¥1.6) by about April 2028, up from CN¥311.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 15.9x today. This future PE is lower than the current PE for the HK Entertainment industry at 14.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.85%, as per the Simply Wall St company report.

NetDragon Websoft Holdings Future Earnings Per Share Growth

Risks

• The education segment is facing significant headwinds in key markets like the U.S. and Europe due to inflation and budget allocation uncertainties, potentially impacting revenues negatively.
  
• Despite a strategic focus on AI, the decline in revenue, particularly a 17% drop in Mynd.ai, indicates challenges in transitioning and capitalizing on AI opportunities, which could affect overall earnings.
  
• The gaming and application service revenue experienced a 6% decrease due to market demand optimizations, suggesting potential weaknesses in sustaining revenue growth in this core segment.
  
• Although profitability metrics like EBITDA and gross margin have improved, the drop in group revenue to RMB 6 billion highlights underlying revenue challenges that could impact future earnings stability.
  
• A one-time non-cash deferred tax provision of RMB 452 million due to losses in Mynd.ai highlights ongoing operational challenges in this unit, possibly affecting net margins and long-term financial health if not resolved.

Valuation

• The analysts have a consensus price target of HK$14.378 for NetDragon Websoft Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of HK$15.88, and the most bearish reporting a price target of just HK$13.02.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥6.0 billion, earnings will come to CN¥854.0 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 10.8%.
• Given the current share price of HK$9.9, the analyst price target of HK$14.38 is 31.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.