[CITIC Securities] Reiterates 'Buy' rating for NetDragon (00777), AI-driven cost reductions show results, focusing on long-term growth

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NetDragon | 777 HK

Investment Rating: Buy

Target Price: 13 HKD

Report Date: April 2, 2026

In 2025, the company achieved revenue/net profit attributable to shareholders of 4.48 billion/150 million yuan. Under its ongoing cost reduction optimization strategy, operating profit in the second half of the year increased by 47.7% year-on-year. The company emphasizes shareholder returns, and we expect it to maintain a dividend of 1 HKD per share in 2026, corresponding to a dividend yield of approximately 11%. The company also recently announced that its chairman will increase his stake in the company within the next 12 months, demonstrating confidence in long-term development. We maintain our 'Buy' rating.

2025 Performance Review:The company released its 2025 earnings announcement, achieving full-year revenue/net profit attributable to shareholders of 4.48 billion/150 million yuan. The company’s full-year gross margin was 70.3%, an increase of 5.1 percentage points year-on-year. Regarding expense ratios, the sales, administrative, and R&D expense ratios were 14.7%, 20.9%, and 22.6%, respectively, showing year-on-year changes of +2.2, +1.7, and -1.0 percentage points. However, operating profit in the second half of the year increased by 47.7%.

▍Gaming and Application Services Business:The company's gaming and application services business generated revenue of 3.28 billion yuan for the full year, with a gross margin of 87.1%, up 0.8 percentage points year-over-year. The R&D, sales, and administrative expense ratios were 25.0%, 12.0%, and 20.1%, respectively, representing year-over-year changes of -6.1 percentage points, flat, and +2.2 percentage points. Total operating expenses (Opex) decreased by 22.1% for the year. Thanks to AI support, the operating profit margin (OPM) of the gaming and application services business improved to 27.4%, an increase of 3.9 percentage points year-over-year. Breaking it down by game, the monthly active users (MAU) of the company's Eudemons IP increased by 11.1% year-over-year, and its revenue in the second half of 2025 rose by 7.1% compared to the first half of 2025. Meanwhile, the yearly revenue from the Conquer and Heroes Evolved IPs grew by 6.4% and 21.3%, respectively.

▍Mynd.AI:The company’s Mynd.AI business generated revenue of 1.2 billion yuan, with a gross margin of 25.0%, and overall operating expenses (opex) decreased by 21% year-over-year. As overseas education large-screen markets gradually recover and the company further controls costs, we expect Mynd.AI's operating profit margin (OPM) to continue improving.

▍Partnership with ByteDance accelerates transformation into an AIGC-driven enterprise.On January 27, NetDragon signed an AI ecosystem and joint innovation cooperation framework agreement with Volcano Engine, ByteDance’s cloud and AI service platform, to build deep collaboration barriers integrating technology, resources, and ecosystems. This partnership aims to scale the production of next-generation AIGC educational resources and create a globally collaborative and shared innovative education ecosystem. By deeply combining NetDragon's comprehensive AIGC strategic capabilities in education, cultural creativity, gaming, and other fields with Volcano Engine’s cutting-edge technological infrastructure, the company is expected to further transform into an AIGC-driven enterprise, enhancing profitability and growth potential.

▍Risk factors:Macroeconomic growth pressures; slower-than-expected game development progress; rising raw material costs; changes in overseas education policies; weaker-than-expected order performance, among others.

Earnings Forecast, Valuation, and Rating:Using a segmented valuation approach: ① Gaming and Application Services Business: We estimate this business will generate net profits of 680 million yuan in 2026. Referring to comparable industry companies' current valuations for 2026 (14x PE for Sanqi Interactive Entertainment, 15x PE for Kingnet Technology, based on Wind consensus forecasts), and considering Hong Kong stock discounts, we assign the gaming and application services business a 7x PE ratio. ② Mynd.AI Business: We project this business will achieve revenue of 1.35 billion yuan in 2026. Referencing comparable industry companies' current valuations for 2026 (0.95x PS for Seewo, 0.92x PS for KTC, based on Wind consensus forecasts), and accounting for Hong Kong stock discounts, we assign Mynd.AI business a 0.55x PS ratio. ③ Additionally, considering the company’s focus on shareholder returns, we apply a 0.5x valuation to its net cash position (2 billion yuan). Based on these factors, we value the company at 7.17 billion Hong Kong dollars for 2026.Corresponding target price of 13 Hong Kong dollars, maintaining a “Buy” rating.

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