Why did the third quarter beat Goldman Sachs’ expectations?

  • G-bits’ revenue fell 10% year on year in the third quarter of 2026, while net profit fell 13%; Goldman Sachs had previously expected declines of 18% and 24%, respectively. The launch of Sword x Staff in Europe and the US contributed to results, while effective control of administrative and R&D expenses softened the decline.
  • The third-quarter operating margin rose to 42%, from 40% in the second quarter. Although selling and marketing expenses were higher than Goldman Sachs expected, stronger game gross billings and cost management supported the margin.

Can overseas launches offset the decline of older games?

  • Sword x Staff is scheduled to launch in South Korea and Southeast Asia on 4 November, while Skyblade: Idle Immortal is also planned for release in Europe and the US in the fourth quarter. Goldman Sachs believes these launches can partially offset declines in other games.
  • However, domestic gross billings for Sword x Staff have already declined quarter on quarter, and its European and US version, which contributed significantly in the third quarter, may also weaken in 2027 as it progresses through its life cycle. Revenue from 《道友来挖宝》 is shrinking under the combined effects of its life cycle and intensifying competition from mini-games.
  • The company has disclosed plans for only two licensed games in the first quarter of 2027. Most new internally developed games, including M98, remain in early development, and Goldman Sachs expects them to launch in 2028 or later.

How has Goldman Sachs adjusted its revenue and profit forecasts?

  • Goldman Sachs raised its 2026 revenue forecast by 10% to 7.22 billion yuan, reflecting better-than-expected gross billings trends and contributions from fourth-quarter overseas launches. However, it cut its 2027 and 2028 revenue forecasts by 3% and 1%, respectively, because of the thinner new-game pipeline.
  • Under the updated model, 2027 revenue is 6.476 billion yuan, down about 10% year on year; earnings per share are 26.29 yuan, down about 9% year on year. Goldman Sachs sees particularly challenging year-on-year comparisons in the second half.
  • Improved cost efficiency led Goldman Sachs to raise its net profit forecasts for 2026–2028 by 2%–10%. New-game promotion may cause margin fluctuations in the fourth quarter of 2026 and the first quarter of 2027. Goldman Sachs expects lower channel fees and efficiency gains from deeper use of AI in R&D to cushion the impact of a higher share of lower-margin licensed games, keeping the 2027 margin broadly at its current level.

Why was the target price cut, and what performance could change the assessment?

  • Goldman Sachs maintained its Sell rating relative to the companies it covers and cut its 12-month target price from 365 yuan to 342 yuan. The new target uses a 2027 forecast price-to-earnings multiple of 13 times, below the previous 14 times based on average earnings for 2026–2027. The adjustment reflects lower valuation multiples for gaming and media peers and the shift in the valuation year.
  • Goldman Sachs believes its revenue forecasts could have upside if new domestic games perform better than expected, the European and US version of Sword x Staff has a longer-than-expected life, or new overseas releases gain greater popularity. A recovery in gaming industry valuation multiples could also improve its assessment.