"Zhongxu Future (9890.HK) Faces Strategic Losses, Short-term Pressures Unchanged Long-term Growth Potential"

Recently, Zhongxu Future (the listed entity of Tanwan Games) issued a profit warning, estimating a net loss of about 360 million to 400 million yuan for the first half of the year, compared to a net profit of 300 million yuan in the same period last year, indicating a significant shift to a loss.

However, fundamentally, this is mainly due to Zhongxu Future's vigorous promotion and publicity of new high-quality games, which has led to an increase in sales and distribution expenses. At the same time, Zhongxu Future has made impairment provisions for prepayments, fixed assets, goodwill, and other items that show signs of impairment, resulting in asset impairment losses. Additionally, due to significant fluctuations in the stock market during the same period, the investment gains and losses of financial assets recorded at fair value have increased.

Promoting new games will inevitably increase sales expenses, which will improve once the payback period begins. Considering Tanwan Games' stable performance in extending the product lifecycle, this has brought a stronger catalyst for performance, and subsequent performance is expected to warm up. The latter two points have little to do with the basic business and do not constitute a profound impact.

Diversified category breakthroughs, new game launch achievements are eye-catching

Looking further, since 2024, in addition to continuing to promote the "Legend" series of products, Tanwan Games has sought breakthroughs in the diversified game category track, launching a number of new games intensively and achieving eye-catching results. This inevitably leads to a significant increase in sales expenses in the short term and also indirectly shows a high marketing investment output ratio.

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According to incomplete statistics, Tanwan Games' 2024-released major IP game "Douluo Continent: Shrek Academy" topped the App Store's free list and TapTap's popular list on the day of its debut, showing the potential to become a hit.

At the same time, "Beast Lord: New World," which topped the iOS free list and several other lists on the day of its debut, is also China's first SLG mobile game to try real animal exploration strategy, bringing players a brand new experience; the multiplayer quick battle casual competitive mobile game "Little Soldier Great War" topped the iOS free list at the beginning of its launch; another major IP game "Douluo Continent: The Legend of Zhu Xie" also achieved first place on TapTap's reservation list.

This year is also known as a year of fierce competition for new games, with the number of version numbers reaching 689 in the first half of the year, and many new games are accelerating towards the market, and the difficulty of Tanwan Games' new games collectively achieving excellent results is also imaginable.

Against this backdrop, although Tanwan Games' strategy of vigorously promoting and publicizing new games is accompanied by a significant increase in sales expenses, it is the only way to expand the market. In addition, it emphasizes the three core advantages of "precision marketing, in-depth operation, and brand development," among which "precision marketing" is the first step. The seemingly high promotion investment effectively reduces resource waste, quickly improves market response speed and conversion rate, and consolidates the foundation for long-term development.

After attracting players into the game through precision marketing, Tanwan Games' in-depth operation allows players to have a good game experience and game interaction, and continue to stay in the game.It's also worth noting that for Tanwan Games, advertising promotion is just one way to acquire users. More importantly, it uses advertising in the form of creative content and innovative formats to reach as many potential players as possible, thereby attracting players to participate in the game. Tanwan Games is also one of the first companies in China to use celebrity endorsements to promote games. Now, it has expanded into more diversified marketing methods, using TikTok live streaming, outdoor check-ins, public domain traffic to private domain maintenance, offline events, and other methods to enhance brand image and game popularity.

This helps to enhance brand momentum, deepen the emotional bond and interactive connection with the player community, and promote natural dissemination among players, forming a long-term attraction effect.

It can be seen that an increase in sales expenses is not necessarily a bad thing. Tanwan Games may be creating a new hit game product.

Strengthen technology empowerment to enhance development advantages and certainty

From a broader perspective, according to the announcement of Zhongxu Future, although the strategic focus is still on the marketing field at this stage, the technological aspect is becoming increasingly prominent, including improving the advantages of precise marketing through AI technology and expanding the boundaries of capabilities. The impressive performance of the aforementioned new games proves this point, and more development potential will be released in the future.

Before 2023, Zhongxu Future independently developed the intelligent terminal user participation platform "Luoshu System" and the business intelligence analysis system "Hetu System". This year, Zhongxu Future further independently developed the AI large model of the "X" intelligent marketing platform based on these two systems to customize and meet the needs of the game advertising marketing field.

Moreover, this year, Zhongxu Future established a subsidiary company focused on AI technology research and development and application, promoting AI throughout the entire life cycle of the game. It is reported that this subsidiary is committed to integrating AI technology into various modules such as in-game art production, creative copywriting, video generation, intelligent assistants, and collaborative office work, and further using AI algorithms and AIGC technology to optimize game operations and promotion, creating new gameplay and experiences for players.

It is believed that with the deepening application of AI, Zhongxu Future will be able to further enhance its core advantages, achieve cost reduction and efficiency improvement, and thus enhance development certainty.

In summary, the loss that Zhongxu Future has incurred this time may be a "strategic loss". That is, under the premise of clear strategic objectives, losses are incurred to achieve strategic goals, and long-term competitive advantages are obtained through losses. This also indicates the possibility of turning bad luck into good luck. For its future development, we might as well wait and see.