Why hasn’t profit improved in line with higher revenue expectations?

  • Following the release of third-quarter 2026 results, Morgan Stanley raised its revenue forecasts for G-bits for 2026 through 2028 by 21%, 6% and 6%, respectively, mainly reflecting contributions from two new games and overseas expansion. These revisions are relative to the bank’s previous model, not year-on-year revenue growth rates.
  • Profit forecasts, however, diverged: the net profit forecast for 2026 rose by 9%, while those for 2027 and 2028 fell by 8% and 7%, respectively. Higher operating costs and lower investment income partly offset the additional revenue, so the revenue upgrade did not translate into an equivalent increase in earnings.

How much spending is needed to generate the additional revenue?

  • Customer acquisition spending is the main pressure. The bank raised its 2026 forecasts for selling expenses by 37% and R&D expenses by 12%; the increase in the selling expense forecast exceeded the 21% revenue forecast upgrade, indicating that this growth requires more spending support.
  • In the model, selling and marketing expenses as a share of revenue rise from 33.6% in 2025 to 36.4% in 2026, before falling back to 33.6% in 2027. Even with the subsequent decline in the expense ratio, the bank lowered its operating margin forecasts for 2027 and 2028 by 2.2 and 1.5 percentage points, respectively, leaving longer-term profitability below its previous expectations.

What is the hurdle to growth in 2027?

  • Morgan Stanley believes that, after a strong performance in 2025–2026, 2027 could mark a trough. Its base case forecasts a shift in year-on-year revenue growth from an increase of 15% in 2026 to a decline of 10% in 2027, while normalized net profit shifts from growth of 11% to a decline of 16%.
  • The key constraint is a thin pipeline of new games, which limits visibility into subsequent growth. Improvement depends on new-game gross billings and operational longevity exceeding expectations, and on faster overseas expansion; conversely, weak new-game gross billings or reduced longevity of existing games would intensify the pressure.

Why was the price target lowered, and what support can dividends provide?

  • The price target was cut from 449 yuan to 389 yuan, alongside a change in the valuation year and multiple: from 18 times 2026 expected earnings to 17 times 2027 expected earnings. The 17 multiple is close to the historical average; the removal of the premium mainly reflects the bank’s low growth expectations for 2027.
  • Morgan Stanley maintained its Equal-weight rating, citing limited growth visibility on the one hand and an estimated dividend yield of about 6% in 2026 that could provide downside support on the other. The bank’s valuation support comes more from dividends and the historical average multiple than from sustained high growth.