CITIC Securities has released a research report raising its earnings per share forecasts for NETDRAGON (00777) for fiscal years 2026-2028, citing better-than-expected cost reduction and efficiency gains. The firm has set a target price of HK$12 and maintained its "Buy" rating on the stock. The brokerage believes the company's proactive deployment of AI employees has driven meaningful improvements in profitability margins across its gaming and application services segments, while the recent launch of the Muyu AI platform marks a pivotal milestone in the company's transformation into an AI-native enterprise, positioning it favorably for long-term growth amid the broader AI浪潮.

First-half 2026 results showed net profit attributable to shareholders reaching RMB 36 million, up 20.0% year-over-year, on revenue of RMB 2.10 billion. Adjusted net profit came in at RMB 254 million, with gross margin expanding 0.4 percentage points to 69.9%. Operating profit grew 24.1% year-over-year to RMB 144 million. On the expense front, selling, administrative, and R&D expense ratios stood at 13.5%, 20.0%, and 19.6%, respectively, representing year-over-year changes of -0.6 percentage points, +0.1 percentage points, and -3.1 percentage points. CITIC Securities noted that AI integration has been instrumental in driving continuous expense optimization.

Revenue from the gaming and application services division recovered sequentially in the first half of 2026, rising 3.1% quarter-over-quarter to RMB 1.59 billion, with gross margin holding steady at 83.3%. R&D, selling, and administrative expense ratios for this segment were 21.1%, 11.2%, and 19.7%, respectively, reflecting declines of 4.0 percentage points, 0.1 percentage points, and an increase of 0.7 percentage points year-over-year. Total operating expenses for this division contracted 14.4% year-over-year. Thanks to the systematic, end-to-end deployment of an AI employee matrix across the organization, AI employees accounted for 35%-40% of total workload during the period, propelling the segment's operating margin to 29.1%—a sequential improvement of 10.3 percentage points. By game title, the Moyu IP saw MAU growth of 24.1% year-over-year, with revenue from the franchise up 3.7% sequentially; overseas revenue from the Conquest IP rose 19.3% year-over-year, while the Heroes of the Soul IP's PC game revenue expanded 4.4% year-over-year.

The Mynd.AI operations are progressing steadily through their transformation. This segment generated revenue of RMB 510 million in the first half of 2026, with gross margin improving 2.3 percentage points year-over-year to 27.7%. R&D, selling, and administrative expense ratios were 14.9%, 20.6%, and 14.9%, respectively, marking year-over-year declines of 1.4, 1.1, and 3.6 percentage points. Total operating expenses for Mynd.AI dropped 29.6% year-over-year. The segment's operating margin improved by 5.5 percentage points year-over-year to -24.9%, while adjusted EBITDA losses narrowed to RMB 63 million. CITIC Securities anticipates continued improvement in Mynd.AI's operating margin as overseas education display markets gradually recover and recurring revenue from services and SaaS offerings keeps growing.

Recently, the company introduced Muyu AI, a multi-scenario AI application ecosystem built on an AI Agent technology foundation. The platform offers specialized tools across video creation, teacher lesson preparation, and programming, presenting a new AI application paradigm for work, learning, creative endeavors, and design. This launch represents a critical step in NETDRAGON's AI transformation journey.

Using a sum-of-the-parts valuation approach, CITIC Securities projects the gaming and application services business to generate net profit of RMB 680 million in 2026. Applying a 7.5x price-to-earnings multiple—calibrated against comparable industry peers' 2026 valuations and adjusted for the Hong Kong listing discount—the segment is valued accordingly. For the Mynd.AI business, the firm forecasts 2026 revenue of RMB 1.19 billion and assigns a 0.55x price-to-sales multiple, similarly benchmarked to peers with the Hong Kong discount factored in. These calculations yield a combined target market capitalization of HK$6.5 billion, corresponding to a target price of HK$12 per share, with the "Buy" rating reaffirmed.