Wuhu Shunrong Sanqi Interactive (002555) Report Interpretation

Overview

UBS reviews Sanqi's Q226 results, which showed weak underlying game revenue and recurring earnings despite a reported net-income beat driven by investment gains. The institution maintains Sell, citing reliance on user-acquisition-led growth in a mature and competitive gaming market, and cuts its target price to Rmb12.80.

Core views

Sanqi's Q226 operating performance was weak excluding investment income. Revenue fell 16% YoY and 4% QoQ to Rmb3.55bn, missing UBS estimates and Visible Alpha consensus by 18% and 13%, respectively. UBS attributes the shortfall chiefly to lower grossing from mature titles, including Nobody's Adventure Chop-Chop, only partly offset by newer games. Gross margin increased 0.9 percentage points YoY to 77% and was broadly in line with expectations. Operating expenses fell 2% YoY and were also in line: lower sales and marketing expense reflected reduced user-acquisition spending as titles matured, but this was offset by higher R&D expense from increased headcount. The weaker topline drove a 47% YoY decline in operating profit, which missed UBS and consensus by 34% and 42%. Reported net profit rose 5% YoY to Rmb893m, exceeding UBS estimates by 33% and consensus by 3%, because of fair-value gains from Zhipu. UBS instead emphasizes the underlying result: recurring net profit fell 52% YoY and 33% QoQ to Rmb406m, 39% below its estimate. This gap between reported and recurring earnings is central to the report's cautious view. UBS notes areas of operational progress. Overseas revenue rose 11% YoY in H1 and represented about 41.5% of total revenue, supported by Puzzle & Survival and contributions from Ragnarok: The New World, Last Asylum: Plague and Z Route: Redemption. Puzzle & Survival had cumulative gross billings above Rmb16.8bn, while Japan accounted for more than half of H1 overseas revenue. The company disclosed a pipeline of 10 self-developed and 12 licensed titles for global and overseas markets, while maintaining a focus on mini-games and light gameplay and investing in SLG, MMORPG and simulation categories. AI is being used across development and operations: it accounts for more than 80% of 2D art assets, over 30% of 3D assets, over 70% of advertising creatives and more than half of ad placement, and supports localisation in 18 languages. Management is also incubating AI-native mini-games to improve development efficiency. Sanqi proposed a Q2 cash dividend of Rmb1.00 per 10 shares, or Rmb220m, equal to a 54% payout ratio based on recurring net profit. Following the Q2 revenue weakness, UBS cuts its 2026E revenue forecast by 15%, implying a 9% YoY decline. It leaves gross-margin assumptions broadly unchanged but lowers sales and marketing estimates by 12% to reflect lower user-acquisition spending from maturing titles. UBS therefore reduces 2026E operating profit by 26%, implying a 29% YoY decline. Its reported 2026E net-profit forecast remains broadly unchanged at Rmb2.9bn because of investment income, but recurring net-profit forecasts are cut by 26%. UBS lowers its DCF-based price target from Rmb13.78 to Rmb12.80 using a 7.6% WACC. The target implies 10x 2026E P/E, or 15x excluding non-recurring items, which UBS describes as one standard deviation below its five-year historical mean and at a discount to top-tier game companies. UBS remains cautious about the sustainability of earnings because growth continues to rely on user acquisition in an increasingly mature and competitive gaming market. It says evidence of successful new-game launches and further overseas expansion would be needed before becoming more constructive.

Analysis framework

UBS compares Q226 revenue, margins, operating expenses and earnings with its own estimates and consensus, separates reported profit from recurring profit, then revises forecasts to reflect weaker game revenue and lower user-acquisition spending. It values the company using a DCF framework and cross-checks the resulting target against forward P/E and historical valuation levels.

Methodology notes

• Valuation methodsDCF (Discounted Cash Flow)

  Discounted cash flow valuation using a 7.6% WACC

  UBS discounts its earnings and cash-flow assumptions into a 12-month price target, then lowers that target after cutting operating forecasts.

• Industry AnalysisVolume-price decomposition

  Analysis of game revenue trends, title maturity and user-acquisition spending

  The report links weaker revenue to declines in mature games and explains operating-profit changes through the interaction of revenue, gross margin and marketing expenditure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Wuhu Shunrong Sanqi Interactive (002555.SZ)

  Primary covered company; UBS maintains a Sell rating after weak Q226 underlying operating results and forecast reductions.

  Strengths

  Overseas revenue grew 11% YoY in H1; Puzzle & Survival remains a major contributor; the company has a 22-title disclosed global/overseas pipeline and expanding AI use.

  Weaknesses

  Mature-title grossing declined, causing a material revenue and recurring-profit miss; growth remains reliant on user acquisition.

  Comparison

  The Rmb12.80 target implies 10x 2026E P/E, or 15x excluding non-recurring items, one standard deviation below the five-year historical mean and at a discount to top-tier game companies.

  Risks

  Faster-than-expected declines in existing hit titles, delayed new-game launches and challenges to the traffic-based game-operating model.

Key data

• Q226 revenueRmb3.55bnDown 16% YoY and 4% QoQ; 18% below UBS estimates and 13% below consensus.
• Q226 gross margin77%Up 0.9 percentage points YoY and broadly in line with expectations.
• Q226 operating profitRmb495mDown 47% YoY; 34% below UBS estimates and 42% below consensus.
• Q226 reported net profitRmb893mUp 5% YoY; supported by fair-value gains from Zhipu.
• Q226 recurring net profitRmb406mDown 52% YoY and 33% QoQ; 39% below UBS estimates.
• H1 overseas revenue growth11% YoYOverseas revenue represented about 41.5% of total revenue; Japan contributed more than 50% of H1 overseas revenue.
• 2026E revenue revision-15%UBS now forecasts a 9% YoY revenue decline.
• 2026E operating-profit revision-26%UBS now forecasts a 29% YoY decline.
• 12-month price targetRmb12.80Reduced from Rmb13.78; based on DCF with a 7.6% WACC.

Impact & implications

The report views the weak Q2 topline and recurring earnings as evidence that mature-title declines are pressuring the earnings trajectory. Overseas growth, the product pipeline and wider AI use are constructive operational factors, but UBS considers successful new launches and further overseas expansion necessary to improve its view.

Risks

• Upside risks identified by UBS are better-than-expected new-game performance, structural improvement in R&D capability and faster-than-expected globalisation progress.
• Downside risks identified by UBS are faster-than-expected declines in existing hit titles, delays in new-game launches and challenges to the traffic-based operating model.

What to watch

• Evidence of successful new-game launches.
• Further overseas expansion, including continued performance from key overseas titles.
• Whether recurring earnings stabilize as mature titles progress through their lifecycles.
• Progress in AI-native mini-games and development-efficiency initiatives.