HeartBeat Company: Games frequently emerge as 'dark horses', TapTap accelerates monetization

On the afternoon of August 29, Beijing time, $XD INC(02400.HK) released its performance for the first half of 2025, slightly exceeding expectations, particularly in TapTap and profitability.

Specifically:

1. Acceleration of TapTap commercialization: Although the monthly active users of TapTap in the first half of the year showed no significant growth, remaining roughly flat year-on-year, this may be due to the fact that the games with impressive revenue in the first half were mainly targeted at overseas markets. However, the advertising revenue per user increased by 36% year-on-year and 23% quarter-on-quarter, reflecting the acceleration of TapTap's commercialization, with the final monetization effect exceeding market expectations.

2. High growth in games as expected: The game segment grew by 39% in the first half, with increases in both the number of players and average spending per player. In addition to the overseas launch of the new game "Ragnarok RO: Origin", "XD Town", and the revitalized revenue of "Torchlight" after adjustments, all contributed to the growth.

However, the final revenue fell short of market expectations. Dolphin Research speculates that this discrepancy may be related to the recognition of revenue on a net basis for some overseas games (such as "Origin") and changes in the ratio of revenue recognition to gross revenue for some games.

The pipeline and revenue expectations for the second half of the year and next year are as follows: "Ether" will launch in the Chinese market at the end of September (expected TTM first-year revenue of 1-1.5 billion), "XD Town" international version (expected TTM first-year revenue of 800 million), "Ragnarok RO: Love's Return 2" will launch in 2026 (expected TTM first-year revenue of 2.5 billion).

Among the above pipeline, Dolphin Research believes that "Love's Return 2" is the key to supporting next year's growth. Unlike this year's "Origin" targeting nostalgic users, this is an open-world mobile game aimed at younger users, expected to leverage the Ragnarok IP to break into new player demographics. Of course, next year is also a big year for open-world games, with major releases planned by Tencent and NetEase. How XD Inc. will stand out is worth anticipating.

3. Efficient operation brought by classic IP: Compared to a brand-new mobile game, developing sequels or re-operating classic games can achieve high monetization with low promotion. Reviewing the changes over the past year, Tencent and NetEase have adopted this strategy, not only setting new records in revenue scale but also raising profitability levels.

While games saw high growth in the first half, sales expenses only increased by 7% year-on-year, and pure promotion expenses, excluding personnel costs, even decreased by 3.6%. Additionally, classic games do not overly rely on external channels, naturally guiding players to download and pay on official servers. This also led to a decrease in channel commission costs for games recognized on a gross basis in the first half, down by 3 percentage points compared to the same period last year and 1 percentage point compared to the second half of last year.

The final core operating cost was 830 million, with a profit margin of 28%, an increase of 5 percentage points quarter-on-quarter. The final net profit was 811 million, slightly exceeding company guidance and market expectations.

4. Performance indicators vs. market expectations

(In the chart below, Bloomberg's expectations are relatively lagging, with significant data discrepancies. It is recommended to refer to company guidance or the latest expectations from investment banks as excerpted by Dolphin Research.)

Dolphin Research's View

The first half of the year ended perfectly, with the shock of the games already evident from revenue tracking and performance forecasts. After the actual performance landed, it was the overlooked TapTap revenue that exceeded expectations.

Of course, the user scale showed no surprises, remaining "lukewarm," but the overall monetization rate improved. The company's explanation is that the advertising system was upgraded and optimized, improving ROI. According to research information, TapTap's eCPM in the first half indeed increased by 15% year-on-year. (If this figure is reliable) Based on this data, it can also be calculated that the display volume increased by 20%. This indicates that in the absence of user growth, the display volume per user increased, either due to an increase in the platform's ad fill rate or an increase in user time spent.

This indicates that not only do customers recognize the promotional value of TapTap more, but the company itself also has a proactive willingness to commercialize. Considering the management's consistently cautious and conservative approach to TapTap commercialization, and given that games can already support a significant portion of the business, it can only be concluded that the TapTap ecosystem is well-established and capable of normal commercialization.

Currently, TapTap's ad pricing is still relatively cheap (eCPM 15 yuan), especially compared to channels like Douyin, Kuaishou, and WeChat, which have crowded inventory positions (25 yuan and above). The launch of the TapTap PC version in the second quarter aligns with the current trend of multi-platform game distribution and operation, potentially building a more complete ecosystem and providing developers with more comprehensive user behavior data and promotional conversion.

From a valuation perspective, we have always believed that XD Inc.'s greater upside potential comes from TapTap. However, only by breaking the user's perception of its tool attribute and establishing a closed/loop ecosystem can TapTap hope to break out of its current performance and reshape its valuation from a long-term perspective. Currently, the trend is positive, with the TapTap ecosystem barrier being further strengthened through account interoperability and community operations.

As for game expectations, since they are already quite full, Dolphin Research will briefly discuss them.

Besides the revival of "Torchlight" after adjustments, the first half saw "Ragnarok RO: Origin" exceed expectations overseas. Based on the current trend, the annual revenue is expected to exceed the company's already relatively optimistic forecast (annual revenue of 3.5 billion), which was completely unexpected by the market before "Origin" launched in April.

The core feature of "Origin" is "nostalgia." Unlike other products in the Ragnarok series, "Origin" targets old players aged 30-40, with content that restores the features of the PC game and a monthly card system. This may result in a longer purchase-to-consumption confirmation cycle than typical MMOs, but the advantage of the monthly card is that with normal content updates and additions, it can make the revenue trend more stable and extend the lifecycle.

This has also raised market expectations for next year's "Love's Return 2." "Love's Return 2" is an open-world game aimed at younger users, expected to help the Ragnarok IP break into new demographics, while also facing a more competitive environment. Next year, Tencent's "Honor of Kings World" and NetEase's "Infinite" are coming in strong. Although "Love's Return 2" cannot be classified in the same category, if it is to shoulder the growth burden next year, facing competition is inevitable.

However, as Dolphin Research candidly admitted in the previous performance forecast commentary "XD Inc. 1H25 Forecast Commentary: Earnings Surprise, Where's the Outperformance?", compared to the beginning of the year, after XD Inc.'s two "dark horse" performances, we have revised our view of its R&D capabilities (at least significantly improved in terms of R&D efficiency and quality, with the number of R&D personnel halved, but the hit rate significantly increased). The lesson learned is that at least in the niche boutique level of 2 billion revenue, we no longer underestimate its strength.

Of course, judging from stock price changes, investors whose expectations have changed significantly are clearly not few. This is a good thing, as it can bring more trust support during XD Inc.'s low points, but it also brings more challenges for XD Inc. to continuously create "outperformance" in the future.

Below are the financial indicator charts

Dolphin Research "XD Inc." Historical Articles:

Earnings Season

August 5, 2025, Performance Forecast Commentary "XD Inc. 1H25 Forecast Commentary: Earnings Surprise, Where's the Outperformance?"

March 28, 2025, Financial Report Commentary "XD Inc.: A Year of "Excitement", A Year of "Disappointment"?"

August 30, 2024, Financial Report Commentary "XD Inc.: How Long Can the Boiling Oil Last?"

March 29, 2024, Conference Call "XD Inc.: Maintaining the Rhythm of Releasing 1-2 Self-developed New Games Annually (2H23 Conference Call Minutes)"

March 28, 2024, Financial Report Commentary ""Double Stock" XD Inc.: 2023 Too Bad? Savior Has Arrived"

August 31, 2023, Conference Call "Industry Recovery, But XD Inc.'s Investment Remains Cautious (XD Inc. 1H23 Performance Conference Call)"

August 31, 2023, Financial Report Commentary "TapTap Returns to Pre-Liberation, XD Inc. Lacks a Second Hit"

March 30, 2023, Conference Call "Lessons from the Past Three Years: No Empty Promises, Talk About Implementation (XD Inc. 2H22 Conference Call Minutes)"

March 30, 2023, Financial Report Commentary "XD Inc.: TapTap Drops the Ball, Saying "Excitement" is Not Easy"

September 1, 2022, Conference Call "XD Inc.: Accelerating the Launch of Core Games, Seeking High Quality in Work (1H22 Conference Call Minutes)"

August 31, 2022, Financial Report Commentary "Unexpected Surprise, XD Inc. Can Be Excited Again"

March 30, 2022, Conference Call "XD Inc.: Hoping to Achieve Breakeven by Going Overseas Without Domestic Licenses (Conference Call Minutes)"

March 30, 2022, Financial Report Commentary "XD Inc.: Abyss After Abyss, Can Going Overseas "Save the Day"?"

August 27, 2021, Conference Call "XD Inc. Conference Call Minutes: Management's Short-term and Long-term Plans Are Still Clear"

August 26, 2021, Financial Report Commentary "XD Inc. Financial Report: Market "Urgent", XD Inc. "Unhurried""

March 26, 2021, Conference Call "XD Inc. 2020 Performance Conference Call Minutes: Game Industry Transformation Is Not Achieved Overnight, XD Inc.'s Growth Is Also Like This"

March 26, 2021, Financial Report Commentary "XD Inc. Investment Essentials: Patience, Patience, and More Patience"

March 1, 2021, Performance Warning Interpretation "Dolphin Research | Profit Plunge, XD Inc. "Deep Squat"? Maybe Just a "Fake Fall""

In-depth

September 27, 2022, Overview "The "Disappeared" Kuaishou, XD Inc., iQIYI, Tencent Music, Can They Reverse Their Predicament?"

February 1, 2021 "Dolphin Research | Behind the "XD Phenomenon": Can You Act When Excited?"

December 29, 2021 "Dolphin Research | Major Research: How Far Is TapTap from Becoming the Chinese Version of Steam?"

December 16, 2021 "Dolphin Research | Behind the "XD Phenomenon": Why Is the Market Excited?"

December 15, 2021 "Dolphin Research | Behind the "XD Phenomenon": Major Changes in the Game Industry!"

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