Why did third-quarter revenue beat expectations while profit fell sharply?

  • In the third quarter of 2026, 37 Interactive’s revenue was RMB 4.091 billion, up 3% year over year and 18% above Goldman Sachs’ forecast. Recurring net profit was only RMB 181 million, down 79% year over year and 73% below the firm’s forecast.
  • Sales and marketing expenses for new games were the main drag: the expense rose 50% year over year and 42% quarter over quarter, and was 71% above Goldman Sachs’ forecast. R&D expenses also rose 29% year over year.
  • Even though gross margin rose to 80%, above Goldman Sachs’ forecast, operating profit calculated on the firm’s basis still fell to RMB 229 million, down 76% year over year. The company reported a third-quarter net loss attributable to shareholders of RMB 296 million, which is a different measure from recurring net profit.

What drove growth from new games, and what was the cost?

  • Goldman Sachs noted that new games such as Last Asylum: Plague, Z Route: Redemption, and Dreaming Back to the Legend of Zhen Huan performed better than the firm expected, offsetting declining revenue from older games.
  • The company reported third-quarter overseas revenue of RMB 2.2 billion, up 59% year over year. Goldman Sachs believes the ramp-up of the first two new games was the main driver.
  • These two products are strategy games. Goldman Sachs noted that this genre requires substantial marketing spending, especially in the early stages, to acquire traffic and users; as a result, revenue growth coincided with pressure on profit. The firm expects the impact of marketing investment to continue in the fourth quarter, but to ease; whether the new games can sustain long life cycles remains key.

How has Goldman Sachs revised its forecasts for future results?

  • Driven by incremental contributions from new games and a lower base in the same period last year, Goldman Sachs expects fourth-quarter 2026 revenue to grow 23% year over year and recurring net profit to grow 8%.
  • Better-than-expected performance from new games led Goldman Sachs to raise its revenue forecasts for 2026–2028 by 6% to 10%. However, because of higher sales and marketing expenses, the firm cut its net profit forecasts for the same period by 11% to 31%.
  • Earnings and shareholder returns are already under pressure: the company announced a third-quarter dividend of RMB 0.1 per share, totaling RMB 220 million, unchanged from the second quarter and below the level of more than RMB 400 million per quarter in 2024–2025. Dividends announced for the first three quarters of 2026 totaled RMB 902 million, below RMB 1.4 billion in the same period of the previous year.

What does the target-price cut reflect?

  • Goldman Sachs maintained its Sell rating and cut its 12-month target price from RMB 16.3 to RMB 15.3. The firm uses 14 times its forecast earnings for 2027, whereas its previous valuation benchmark was the average forecast earnings for 2026–2027.
  • The report said that, based on recurring net profit, the stock was then trading at about 15 times forecast earnings for 2027, above the average of about 12 times for Chinese internet companies covered by Goldman Sachs.
  • Goldman Sachs cited upside risks to its rating, including longer-than-expected life cycles for new games, the launch of more blockbuster titles, and profit improvement from cost controls or lower marketing expenses.