XD 1H25 Preview Commentary: Earnings Surprise with Significant Increase, Where is the Outperformance?

$XD INC(02400.HK) released a positive profit alert for the half-year last night. Over the past two years, XD Inc. has consistently produced dark horse games, marking a significant turnaround compared to the previous two years.

Compared to investment bank expectations, the profit beat was slightly higher (institutional full-year expectation of 1.2 billion vs. XD Inc.'s half-year 800 million). The company also announced its participation in the MiAO project, which is expected to achieve mutual benefits with TapTap in the future. Coupled with relatively active capital sentiment in the gaming sector, today saw a significant rally driven by multiple positive factors.

1. First-half revenue is expected to be 3.05 billion, up 37% year-on-year and 10% quarter-on-quarter. Contribution sources:

(1) "Ragnarok M: Eternal Love - Beginner's Server" was newly released in Hong Kong, Macau, Taiwan, and Southeast Asia in February and April, respectively, with good performance. It is planned to be launched in other regions this year.

(2) "XD Town" is a high DAU game launched in the domestic market in the second half of last year, contributing pure incremental growth in the first half of 2025, with plans to launch internationally within the year.

(3) "Torchlight: Infinite": A game released in the second half of 2023, with a significant decline in the first half of 2024. However, many content adjustments were made for treasure-hunting players over the past year, with excellent season performance at the end of last year, and the popularity continued into the first half of the year.

(4) Other new games: Incremental contributions from the Japanese version of "Let's Go Muffin" and others.

(5) TapTap: Monthly active users remained stable, but improvements in advertising algorithms and user engagement led to monetization exceeding expectations.

2. Net profit not less than 790 million, yoy 215%.

Since net profit involves some other gains and losses unrelated to the main business, we estimate the operating profit for the first half of 2025 to be around 900 million. The announcement mentioned issues with salary growth, so we expect operating profit for the first half to be nearly 900 million, with an operating profit margin of 28%, which is quite close to the company's forecast.

This profit margin level is relatively high compared to traditional gaming companies. Although TapTap is a platform and engages in advertising monetization, its profit margin should also be low due to its relatively early stage of commercialization. Therefore, we tend to believe that XD Inc.'s self-developed games have higher profitability because some of the revenue goes through TapTap, reducing some of the distribution and external promotion costs, thus having a higher profitability than peers (10-20%).

3. Investment in 5% equity of MiAO.

MiAO is a company developing a gaming social platform and is currently developing its first open-world type game. XD Inc. acquired a 5.3% stake for $14 million, valuing the company at $265 million.

MiAO's CEO, Wu Meng, previously worked at Giant Network and is skilled in creating high DAU casual games (notable work "Battle of Balls"). He became a non-executive director of XD Inc. in 2023. Before XD Inc.'s investment, MiAO had already raised nearly 500 million RMB in total financing.

This investment helps lay the foundation for future promotion of MiAO's high DAU games (open-world type), achieving a win-win situation for TapTap and MiAO.

4. What's next?

After the overseas launch of "Ether Reboot Day" in June, its performance was also good. The domestic version is scheduled for September 25th, and it is expected to support growth in the second half of the year. Like "Let's Go Muffin" at the time, the performance of a single game significantly exceeded Dolphin Research's initial expectations.

In addition, "XD Town" is also expected to be a major contributor to incremental growth, with the domestic version's anniversary celebration starting on July 17th, and the overall ranking has improved. The overseas version will also be launched in the second half of the year.

The "Ragnarok" IP has another mobile game "Ragnarok RO: Guardians of Eternal Love 2" pending release, with the first test planned for December, expected to be a major launch plan for next year. Continuous development or major updates for large IPs is also XD Inc.'s main strategy at present.

Due to the consecutive emergence of "dark horse" games, we expect the market to temporarily set aside concerns about next year's pipeline and increase confidence in XD Inc.'s R&D. Based on industry standard valuation multiples and this year's performance, we give XD Inc. a valuation:

Overall, at a 15% tax rate, the post-tax operating profit for this year is expected to be nearly 1.6 billion. After today's rally, the valuation corresponds to approximately 20x the 2025 performance (compared to NetEase's 16x), placing it at a mid-to-high level in the Hong Kong stock gaming industry. However, XD Inc. has the additional narrative of TapTap, allowing for a bit more premium.

In an optimistic scenario, the two businesses can be valued separately, as shown in the chart below, with a combined valuation of 36 billion HKD based on this year's performance.

Risk disclosure and statement of this article:Dolphin Research Disclaimer and General Disclosure