New 'Wukong' Game And AI Education Products Will Expand Offerings Across Gaming And Education

Key Takeaways

• Strategic shifts towards software and services, alongside AI-enhanced educational products, aim to boost revenues and improve profit margins.
  
• Emerging market expansion in gaming and education sectors is expected to drive revenue growth and enhance geographic diversification.
  
• Economic and geopolitical risks, governance uncertainties, and challenges in adapting new models could constrain NetDragon's revenue growth across key segments.

Catalysts

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

• The introduction of a new game, Wukong, is expected to provide a boost to the gaming segment, potentially increasing revenues and market share.
  
• The strategic focus on Classroom-as-a-Service (CaaS) and the shift from hardware to a software and services model are aimed at expanding Mynd.ai's offerings and could improve future revenue streams and profit margins.
  
• Planned introduction of a new AI-enhanced educational product by the end of the year could drive growth in the education sector, positively impacting revenues as well as operational efficiencies.
  
• Efforts to reduce costs and increase efficiency, such as sales and marketing expenditure reductions and relocations of certain operations to reduce tariffs, are likely to enhance net margins.
  
• The focus on emerging markets like the Middle East for expansion in both gaming and educational services is seen as a growth catalyst that could increase revenues and geographic diversification.

NetDragon Websoft Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming NetDragon Websoft Holdings's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.7% today to 18.9% in 3 years time.
• Analysts expect earnings to reach CN¥1.4 billion (and earnings per share of CN¥2.15) by about February 2028, up from CN¥450.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.3x on those 2028 earnings, down from 13.4x today. This future PE is lower than the current PE for the HK Entertainment industry at 14.8x.
• 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 9.71%, as per the Simply Wall St company report.

NetDragon Websoft Holdings Future Earnings Per Share Growth

Risks

• Economic downturns and geopolitical tensions, such as inflation in the U.S. and the war in Ukraine, pose risks to revenue by impacting consumer spending and government budgets in key markets.
  
• The separate governance of Mynd.ai on the New York Stock Exchange, despite its association with NetDragon, creates uncertainty and limits NetDragon's direct control over potential future earnings and operational decisions.
  
• Short-term issues in overseas gaming markets, coupled with a lack of new game launches in the first half of the year, may hinder revenue growth in the Gaming & Application Services segment.
  
• The shift towards SaaS and CaaS models is still a work in progress, with unclear specifics and timelines, posing risks to revenue projections if these offerings do not meet market expectations or are delayed.
  
• Reduction in revenue from Mynd.ai due to normalization of hardware demand post-COVID-19 and inflation pressures suggest potential constraints on growth and reliance on emerging software and service-based models.

Valuation

• The analysts have a consensus price target of HK$16.048 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$18.18, and the most bearish reporting a price target of just HK$14.83.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CN¥7.6 billion, earnings will come to CN¥1.4 billion, and it would be trading on a PE ratio of 7.3x, assuming you use a discount rate of 9.7%.
  
• Given the current share price of HK$12.18, the analyst price target of HK$16.05 is 24.1% 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.