Key takeaway
In 3Q26, the company recorded revenue of RMB2.461bn, up 64.4% YoY; net profit attributable to shareholders of the parent company was RMB641mn, up 1.2% YoY; recurring net profit was RMB624mn, up 7.3% YoY and 0.5% QoQ. We expect published titles such as Flame Awakening to sustain strong revenue growth, while a higher expense ratio weighed on profit performance.
The gross margin was 76.4% in 3Q26, up 2.8 pcts QoQ; the selling expense/R&D expense ratios were 39.0%/5.4%, up 3.4/1.1 pcts QoQ. Operating cash flow was RMB539mn, down 47.9% QoQ; contract liabilities were RMB614mn, down 10.5% QoQ.
We are positive on the medium- to long-term potential of Legend IP integration and the AI content platform: 1) the proposed indirect equity investment in Wemade could strengthen synergies across R&D, publishing, and 996 Game Box; watch the transaction progress; 2) SoonPlay has been launched and could lower barriers to content creation through AI, while monetization could be supported by content selection, incubation, and publishing; watch the creator ecosystem and monetization progress.
Event
The company releases its 3Q26 and 9M26 results. In 3Q26, revenue was RMB2.461bn, up 64.4% YoY; net profit attributable to shareholders of the parent company was RMB641mn, up 1.2% YoY. In 9M26, revenue was RMB7.258bn, up 78.1% YoY; net profit attributable to shareholders of the parent company was RMB2.069bn, up 30.7% YoY.
I. Results overview: Publishing supports strong revenue growth, while recurring profit remains stable QoQ
Revenue maintained strong growth in 9M26, while recurring profit was broadly stable QoQ in 3Q26. In 9M26, revenue was RMB7.258bn, up 78.1% YoY; net profit attributable to shareholders of the parent company was RMB2.069bn, up 30.7% YoY; recurring net profit attributable to shareholders of the parent company was RMB1.791bn, up 17.8% YoY. In 3Q26, revenue was RMB2.461bn, up 64.4% YoY and down 4.4% QoQ; net profit attributable to shareholders of the parent company was RMB641mn, up 1.2% YoY and down 1.0% QoQ; recurring net profit attributable to shareholders of the parent company was RMB624mn, up 7.3% YoY and 0.5% QoQ. We expect published titles such as Flame Awakening to remain the main source of revenue growth, with continued support from the monetization of 996 Game Box.
Profit in 3Q26 was mainly driven by recurring gains, indicating stable core business operations. Non-recurring gains were approximately RMB17mn in 3Q26, down from approximately RMB26mn in 2Q26; the recurring net margin was 25.4%, up 1.2 pcts QoQ.
II. Profitability and cash flow: Gross margin recovers from 2Q26, while a higher expense ratio offsets part of the improvement
Gross margin recovered from 2Q, with the game box business expected to provide support. Overall gross margin was approximately 76.4% in 3Q, up 2.8 pcts QoQ but 0.5 pct below the overall level in 1H. We expect the higher revenue contribution from game publishing to result in a lower gross margin for the gaming business than in 1H. However, continued revenue growth from the high-margin 996 Game Box should support the overall gross margin. In 3Q, the selling expense ratio, administrative expense ratio, and R&D expense ratio were 39.0%, 2.1%, and 5.4%, respectively, changing by +3.4 pcts, -0.2 pct, and +1.1 pcts QoQ. The improvement in gross margin was partly offset by higher expense ratios.
Operating cash flow and contract liabilities declined from their high levels in 2Q. Net operating cash flow totaled RMB2.002bn in the first three quarters, up 52.0% YoY. It was RMB539mn in 3Q alone, down 7.2% YoY and 47.9% QoQ. As of end-September, contract liabilities were RMB614mn, down 10.5% from end-June but up 64.2% from the beginning of the year. Cash and cash equivalents were RMB5.507bn, while financial a ssets held for trading were RMB1.728bn.
III. Key catalysts: Legend IP integration and expansion of the AI gaming content platform broaden growth potential
Indirect equity investment in Wemade may deepen cooperation on the Legend IP; monitor transaction closing. The company plans to invest approximately RMB2.030bn for an indirect equity stake in Wemade. Upon completion, its look-through economic interest will be approximately 19.72%. This should strengthen synergies between Legend game development and publishing and the 996 Game Box, while expanding cooperation on overseas product distribution. According to Korean media reports citing Wemade's corrected announcement dated October 14, the expected date for the final payment and change of largest shareholder wa s postponed from October 30 to December 30. Key factors to monitor include transaction closing and the implementation of specific licensing arrangements.
SOON is expanding into an AI-powered content generation and distribution platform. The Jiyi SOON large language model has completed the filing for generative AI services. SoonPlay was launched on October 20, connecting game creation, content distribution, and user experience. The platform is expected to lower barriers to game creation and expand content supply, followed by monetization through content selection, incubation, and publishing. Key factors to monitor include creator activity, high-quality content supply, and monetization progress.
Earnings forecast and valuation. The company still has ample deferred revenue for recognition in 2H26. In addition, we expect the improving trend in gross billings for Flame Awakening to continue, alongside ongoing commercialization of the 996 Game Box, providing high visibility for near-term earnings growth. Over the medium term, self-developed titles such as Tomb Raider’s Notes: Departure are expected to generate incremental revenue, while stronger publishing capabilities should expand the underlying revenue base. We forecast operating revenue of RMB9.440bn, RMB10.483bn, and RMB11.421bn for 2026–2028, respectively; net profit attributable to shareholders of the parent company of RMB2.693bn, RMB2.995bn, and RMB3.278bn, respectively; and corresponding P/E multiples of 13.23x, 11.90x, and 10.87x at the current share price, respectively.
Risks:
Macroeconomic downturn; declining industry prosperity; declining turnover of existing games; the declining total number of game users; operational errors in key projects; delayed launch of new games; worse-than-expected performance of newly released games; falling ROI in marketing and promotion; rising marketing cost; slower-than-expected obtainment of game license; game industry content oversight; intensified industry competition; rising labor cost; loss of core talents; exchange rate fluctuations affecting net profit; investment return fluctuations affecting net profit; change in players' preferences; worse-than-expected user retention for Legend products; worse-than-expected Legend IP cooperation and transaction closing; worse-than-expected commercialization of the AI gaming platform.