Soochow: "Buy" rating for NetDragon (00777) with diversified investments boosting performance. Target price is HK$17.59.

Soochow released a research report stating that NETDRAGON (00777) is expected to have a net profit attributable to the parent company of 4.0/6.7/6.8 billion yuan in 2025-2027, with corresponding PEs of 13.6/8.1/8.0 times the current market value. According to the SOTP valuation method, the company's target market value is 8.5 billion yuan, corresponding to a target price of HKD 17.59 per share. The bank is optimistic about the company's stable operation of existing games, the benefit of the education business from the equipment update cycle, AI fully empowering game education, and diverse investments contributing to performance growth. First coverage, with a "buy" rating. Main points from Soochow include: Gaming: Evergreen IPs build a performance base, AI empowers cost reduction and efficiency improvement The company has been focusing on the MMORPG track for many years, using long-term IPs such as "Condor Heroes," "Conquer Online," and "Blade of the Immortal" to build a solid performance base, with strong user stickiness and long-term operational capabilities. Among them, the flagship IP "Condor Heroes" has been a strong benchmark product in the domestic MMORPG track for nearly twenty years, maintaining a high operating profit margin. The company fully implements the "AI + gaming" strategy, with AI currently involved in various areas such as art production, code writing, and multilingual localization, helping existing games quickly launch multilingual versions (such as the overseas version of "Blade of the Immortal"), expanding the global market at low cost, and accelerating the development of "PC games to mobile games." Under AI empowerment, R&D expenses for the gaming and application services segment in 2025H1 decreased by 26.7% year-on-year, with the bank optimistic about AI continuously reducing costs and improving efficiency to release profits in the gaming business. Education: Leading in education interactive display devices, AI + SaaS opens a new transformation cycle Subsidiary Mynd.ai is a global leader in education interactive display devices, with cumulative sales of 1.37 million units of Prometheus from 2016 to 2024, ranking first globally with a market share of nearly 16% in the global stock device market in 2024, covering over 1 million classrooms worldwide. Considering the gradual replacement cycle as the education equipment purchased during the peak of the COVID-19 pandemic in North America in 2020-2021 gradually expires, there is a broad market space for the next round of replacement. The company's SaaS ecosystem began to take shape in 2025H1, Explain Everything continued to grow, and the company introduced AI voice assistants through the acquisition of Merlyn Mind to enhance users' voice control capabilities for hardware and link teaching resources and SaaS tools on the software side, strengthening the barrier of "hardware + SaaS" and accelerating the transformation to a high-margin subscription model of "AI + SaaS", with the potential to improve sustainability and profitability. The bank is optimistic about the hardware advantages of Mynd, leveraging the potential application of AI in educational scenarios, gradually releasing profits under the background of a gradual equipment update cycle and SaaS transformation, and turning losses into profits. Strategic investments: Layout in AI, AR, and pan-entertainment tracks, building a long-term growth ecosystem The company's investment layout focuses on "AI technology, AR hardware, pan-entertainment," and other directions, with synergies with the gaming and education core businesses, capturing opportunities in emerging tracks to create multiple potential growth points: AI technology is expected to drive intelligent gaming interactions, generate personalized educational content, and improve the quality and efficiency of the dual core businesses; AR hardware creates virtual and real scenes to enhance gaming immersion and the fun of educational products; the pan-entertainment track aggregates traffic and incubates IPs, bringing user increments to the dual core businesses, empowering brand value, and connecting the "technology-scene-user" loop. The company's strategic investments in ROKID, Create Idea, and Handsome Stock Network further strengthen the company's ecological layout in the fields of AI, AR, pan-entertainment, etc. In terms of AI, the subsidiary Create Idea signed a cooperation agreement with Zhongke Wenge, becoming the exclusive overseas platform and business partner of Zhongke Wenge in overseas markets. Currently, the two parties have cooperated to develop a variety of AI large model products, helping the company seize the first-mover advantage in AI large models; in terms of AR and metaverse layout, the company strategically invested in the AR glasses leader Rokid, exploring new application scenarios for metaverse education and games; in terms of pan-entertainment, the company invested in Handsome Stock Network, seizing the opportunity in the popular group broadcasting track to continually contribute to performance growth, and provide new channels for IP promotion in the gaming core business and user reach in the education core business. In addition, the company has joined the Open-Q ecosystem, laying out the educational metaverse. The company's AI production center will create AI computing power and high-quality educational content infrastructure for the educational ecosystem Open-Q, and will obtain more tokens through the calling of the infrastructure in the future.