Last night, $XD INC(02400.HK) released a profit warning, and Dolphin Research is here to discuss:

The earnings forecast shows that the company expects to achieve revenue of 4.96 to 5.04 billion yuan for the full year of 2024, a year-on-year increase of 46.3% to 48.7%; it expects to achieve a net profit of 860 million to 940 million yuan, with a profit margin of about 18%. This is mainly benefited by the contribution of three popular games: "Let's Go Muffin," "Sword of Lily of the Valley," and "Heart Town."

Compared to market expectations, this performance mainly exceeds expectations on the profit side, while revenue is slightly below expectations. Combined with the revenue trends of the three games, Dolphin Research speculates that the real surprise may come from the high-margin TapTap advertising revenue. For Heart Company, self-developed games contribute cash flow, while TapTap contributes valuation; both are indispensable, especially since TapTap's user growth also relies on the traffic driven by self-developed games.

Therefore, the popularity of self-developed games last year, especially the life simulation game "Heart Town" with a large DAU, significantly contributed to TapTap, and the company's balanced commercialization of "Heart Town" also ensures that this high DAU game's product cycle will be longer, providing more sustained traffic support for TapTap.

Looking ahead, in the short term, TapTap may have a more favorable push than self-developed games. On one hand, AI can optimize the advertising recommendation engine, improving accuracy and attracting more budget from game developers. On the other hand, the issue of the Apple tax is currently under review by domestic authorities; if adjustments are made, such as TapTap restoring its iOS launch, it would bring greater traffic to TapTap.

However, the hidden risk is that the pipeline for self-developed games is relatively lacking for the foreseeable future, with "Ethereal Reboot Day" expected to launch this year, which may put pressure on subsequent short-term performance. Therefore, in this earnings release, it is recommended to pay close attention to the company's descriptions related to R&D projects.