CITIC Securities: NetDragon (00777) launched Moyu AI. Key progress has been made in AI transformation. The target price is HK$12, maintaining a “buy” rating

CITIC Securities released a research report saying that considering NetDragon (00777)'s progress in reducing costs and increasing efficiency was better than expected, it raised the company's 2026-2028 EPS, gave the company a comprehensive target price of HK$12, and maintained a “buy” rating. CITIC Securities believes that the company actively uses AI employees to reduce costs and increase efficiency, and that profit margins in the game and application service business have improved markedly. At the same time, it has made key progress in transforming into an AI-native enterprise, and is optimistic about the company's long-term development under the AI wave.

CITIC Securities's main views are as follows:

1H26 net profit to mother increased 20.0% year-on-year

In the first half of 2026, the company achieved revenue of 2.10 billion yuan, net profit to mother of 0.36 million yuan, an increase of 20.0%; adjusted net profit of 254 million yuan, gross margin of 69.9%, an increase of 0.4 percentage points over the previous year; and operating profit of 144 million yuan, an increase of 24.1% year on year.

In terms of cost ratios, sales, administration, and R&D expenses were 13.5%, 20.0%, and 19.6%, respectively, down 0.6 percentage points, up 0.1 percentage points, and 3.1 percentage points, respectively, from the previous year. CITIC Securities pointed out that with the power of AI, the company's expense ratio continues to be optimized and improved.

Game and application service business revenue recovered month-on-month, and AI enabled cost reduction and efficiency

In the first half of 2026, the company's game and application service business revenue was 1.59 billion yuan, up 3.1%; the gross profit margin was 83.3%, and the R&D, sales and administrative expenses rates were 21.1%, 11.2%, and 19.7%, respectively, down 4.0 percentage points, down 0.1 percentage points, and 0.7 percentage points, respectively. Overall Opex expenses decreased by 14.4% year on year.

Thanks to the organization, full link, and systematic deployment of the AI employee matrix, the company's AI employee workload share increased to 35%-40% in the first half of 2026, and the game and application service business OPM reached 29.1%, an increase of 10.3 percentage points over the previous year.

Looking at games, in the first half of 2026, Magic Domain IP MAU increased 24.1% year on year, Magic Domain IP revenue increased 3.7% month on month; Conquest IP overseas revenue increased 19.3% year on year, and Soul Blade IP mobile game revenue increased 4.4% year on year.

Mynd.AI's operational transformation progresses steadily

In the first half of 2026, the company's Mynd.AI business revenue was 510 million yuan, with a gross profit margin of 27.7%, an increase of 2.3 percentage points over the previous year. The R&D, sales, and administrative expenses rates were 14.9%, 20.6%, and 14.9%, respectively, down 1.4 percentage points, 1.1 percentage points, and 3.6 percentage points, respectively. Overall Opex expenses decreased 29.6% year on year.

The Mynd.AI business OPM was -24.9%, up 5.5 percentage points from the previous year, and adjusted EBITDA losses narrowed to 63 million yuan. CITIC Securities anticipates that with the gradual recovery of the large screen market for overseas education, the company's service and SaaS recurring revenue will continue to grow, and the mynd.AI business OPM is expected to continue to improve.

With the launch of Meyu AI, key progress has been made in AI transformation

Recently, the company launched Moyu AI. According to the research report, Meyu AI is a multi-scene AI application ecosystem built using AI agents as a technical foundation. It has various specialized tools in the fields of video creation, teacher preparation, programming, etc., providing a new AI application paradigm for work, learning, creation and design.

Adopt the segmental valuation method

In terms of the game and application services business, the net profit of the business is expected to be $680 million in 2026, with reference to the 2026 valuation level corresponding to the current price of the company in the industry, and considering the Hong Kong stock discount, giving the business 7.5 times PE; in terms of the mynd.AI business, the revenue is expected to be 1.19 billion yuan in 2026. Also, with reference to the industry's 2026 valuation level corresponding to the current price of the company and considering the Hong Kong stock discount, the Mynd.ai business will be 0.55 times PS. The company was given a comprehensive target market value of HK$6.5 billion, corresponding to a target price of HK$12, maintaining a “buy” rating.