Goldman Sachs downgrades 37 Interactive Entertainment to Sell: Declines in flagship games and uncertainty over new titles weigh on growth

Overview

This is a rating change report by Goldman Sachs on 37 Interactive Entertainment (002555.SZ). The core view is that the company's short-term growth will be dragged down by the decline of older games, lack of visibility on new blockbusters, and intensifying industry competition; although investment income in 2026 may contribute meaningfully to reported profit and dividend yield also provides some support, recurring profit growth is only in the mid-single digits and valuation is not cheap relative to peers.

Core views

Goldman Sachs believes 37 Interactive Entertainment may face a period of sluggish growth over the next 6 months. The main reasons include: first, gross billings and rankings for flagship games such as 寻道大千, The Big Bang of Time, and 英雄没有闪 have declined notably; second, visibility on the new game pipeline is low, and while Last Asylum: Plague, Survival 33 Days, and Z Route: Redemption have some bright spots, their lifecycle durability remains unproven; third, competition in domestic mini-games and overseas SLG is intensifying, raising traffic and user acquisition costs. Based on relative valuation within coverage, Goldman Sachs downgrades the rating to Sell.

Analysis framework

The report draws on third-party game gross billings and WeChat mini-game top-grossing rankings, company financial forecasts, differences between GSe and Visible Alpha consensus, peer valuation comparisons, and Goldman Sachs' relative rating framework within coverage. For valuation, it continues to apply 14x 2026E P/E and derives a 12-month target price of Rmb18.90 accordingly.

Methodology notes

• Valuation methodsP/E target price method

  Relative valuation based on 2026E P/E

  Goldman Sachs maintains a 14x 2026E P/E multiple and, combined with its lowered earnings forecasts, cuts the 12-month target price from Rmb19.60 to Rmb18.90.

• rating_frameworkRelative rating within coverage

  Sell rating determined relative to covered stock universe

  The report states that the rating on 37 Interactive Entertainment is determined relative to Goldman Sachs' covered China internet and gaming-related companies rather than by absolute return ranking; the new target price implies 3% downside, versus average upside of 43% for Goldman Sachs' China internet coverage.

• operating_trackingGame gross billings and rankings tracking

  Use key game gross billings, rankings, and lifecycle to assess revenue trends

  The report tracks the performance of flagship and new games in WeChat mini-game top-grossing rankings and global gross billings to assess the impact of aging game decline, new title retention, and user-acquisition efficiency on revenue and profit.

• factor_profileGS Factor Profile

  Comparison of growth, financial returns, valuation multiples, and composite percentiles

  Goldman Sachs discloses that its factor framework compares individual stocks with the market and industry peers across growth, financial returns, valuation multiples, and composite percentiles, but the core rating conclusion in this report mainly comes from operating forecasts and relative valuation within coverage.

Asset mapping & comparison

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

• 37 Interactive Entertainment (002555.SZ)

  Covered company; China A-share game development and publishing company

  Strengths

  The company has global publishing capabilities, user-acquisition and localization experience, and has paid more than Rmb2.2bn in dividends annually over the past two years; an approximately 80% payout ratio and around 5% dividend yield provide some support.

  Weaknesses

  Rankings and gross billings of flagship mini-games have fallen significantly, visibility on the new blockbuster pipeline is low, and near-term revenue and recurring profit growth are under pressure.

  Comparison

  Based on recurring net profit, the company trades at about 14x 2026E P/E, above Goldman Sachs' China internet coverage average of about 13x; the target price implies 3% downside, versus 43% upside for the coverage average.

  Risks

  Major upside risks to the Sell view include better-than-expected performance and lifecycle durability of new games, stronger-than-expected control of marketing expenses, re-rating of online gaming or the A-share media sector, and more aggressive dividend or shareholder return policies.

Key data

• Rating changeSell from NeutralGoldman Sachs downgraded 37 Interactive Entertainment to Sell on expectations of weak short-term growth and relatively high valuation versus peers.
• 12-month target priceRmb18.90The target price was lowered from Rmb19.60, based on 14x 2026E P/E.
• Current price and implied returnRmb19.50；-3.1%The report cover page lists the current price at Rmb19.50, with the target price implying about 3.1% downside.
• Market capitalizationRmb43.2bn / $6.4bnThe company's market capitalization as listed in the report's Key Data section.
• Enterprise valueRmb39.7bn / $5.9bnThe enterprise value as listed in the report's Key Data section.
• 3-month average daily trading valueRmb865.6mn / $126.6mnThe liquidity metric as listed in the report's Key Data section.
• 2Q26E revenue and recurring net profitRevenue -7% yoy；recurring net profit -17% yoyGoldman Sachs expects both 2Q26E revenue and recurring profit to face yoy pressure.
• 2026E revenue and recurring net profitRevenue -3% yoy；recurring net profit +5% yoyReported profit may be supported by investment income, but recurring profit growth is only in the mid-single digits.
• Valuation comparison14x 2026E P/E vs coverage average 13xBased on recurring net profit, the company's valuation is above the average level of Goldman Sachs' China internet coverage.
• Dividend yield4%-5% 2026EDividend yield is viewed as a support factor, but insufficient to offset the downgrade factors.
• Last Asylum: Plague gross billingsCumulative total exceeds Rmb300mnThe new title has performed fairly well, but may come with high user acquisition spending, and future retention remains to be verified.
• Forecast revisions2026E-28E revenue cut by 8%-10%；recurring net profit cut by 2%-13%The downward revisions mainly reflect declines in flagship games and limited visibility on the new game pipeline.

Impact & implications

The report has negative investment implications for 37 Interactive Entertainment: short-term revenue and recurring profit growth lack strong catalysts, while valuation does not reflect a clear discount, resulting in limited downside to the target price but reduced attractiveness relative to peers. If new game lifecycles exceed expectations, user-acquisition efficiency improves, or the industry's valuation is re-rated, these could pose upside risks to the Sell view.

Risks

• If gross billings and retention for Last Asylum: Plague, Survival 33 Days, and Z Route: Redemption exceed expectations, revenue and profit forecasts could be revised upward.
• If the company launches more blockbuster games going forward, current concerns over insufficient pipeline visibility may be alleviated.
• If the company significantly lowers selling and marketing expenses through its user-acquisition experience, net profit could exceed Goldman Sachs' forecasts.
• If the online gaming or A-share media sector is re-rated due to policy, industry growth, or AIGC gameplay themes, 37 Interactive Entertainment's valuation multiple could expand.
• If the company adopts a more aggressive dividend or shareholder return policy, it could become a catalyst for share price upside.
• Conversely, if older games decline faster than expected, new game lifecycles prove insufficient, or user acquisition costs continue to rise, revenue and profit pressure could increase further.

What to watch

• Subsequent rankings of flagship mini-games such as 寻道大千, The Big Bang of Time, and 英雄没有闪 on the WeChat mini-game top-grossing chart.
• Global gross billings trends, user-acquisition intensity, and retention performance of Last Asylum: Plague.
• Ranking stability of Survival 33 Days on WeChat mini-game charts.
• Whether Z Route: Redemption can achieve sustained scaling from a relatively small revenue base.
• Launch cadence and blockbuster probability of pipeline games across RPG, SLG, Idle, Casual, and Match-3 Puzzle categories.
• Whether the selling and marketing expense ratio continues to decline, and whether cost discipline can offset revenue pressure.
• Whether the A-share media and online gaming sectors see catalysts related to policy, industry growth, or AIGC gameplay.
• Whether the company's future dividend and shareholder return policy becomes more proactive.