For stock investors, authoritative, professional, timely and comprehensive analyst reports help uncover potential thematic opportunities. In this year's interim reporting season, 37 Interactive Entertainment Network Technology Group Co.,Ltd. (002555.SZ) has once again delivered a scorecard showing shrinking revenue. In the first half, the company's revenue fell more than 14% year-on-year. Although net profit attributable to shareholders rose sharply year-on-year, this was mainly driven by non-recurring gains and losses, while non-GAAP net profit, which reflects the true profitability of the core business, actually plunged more than 26% year-on-year.

It was noted that alongside the revenue decline, high costs and expenses were the main reason for the pressure on 37 Interactive Entertainment's core business profitability in the first half. In the first half of this year, against the backdrop of an overall industry recovery, the company's domestic business revenue and gross margin both declined. Although overseas business revenue grew year-on-year, it still fell short of its historical peak for the same period. In the first half of this year, the company's core mobile game business revenue continued the downward trend seen in the same period last year, and the gross margin of this business fell significantly compared with its historical peak for the same period. The nearly 40% year-on-year decline in net operating cash flow more directly reflects the weakening cash-generating capacity of 37 Interactive Entertainment's core business.

Even so, the company still distributed a total of RMB 682 million in dividends in the first half, accounting for nearly 40% of net profit attributable to shareholders for the same period, of which about RMB 238 million flowed into the pockets of the top three shareholders, including the company's actual controller.

Profit Growth Mainly "Burnished" by Large Investment Gains

37 Interactive Entertainment listed in 2011 and is mainly engaged in the research and development, publishing and operation of online games, primarily mobile games and web games. The company has strong competitive advantages in the mini-game segment. In the first half of this year, 37 Interactive Entertainment achieved revenue of RMB 7.275 billion, down 14.28% year-on-year; net profit attributable to shareholders of RMB 1.766 billion, up 26.14% year-on-year; and non-GAAP net profit of RMB 1.016 billion, down 26.74% year-on-year.

It was noted that in recent years, 37 Interactive Entertainment's revenue and profit growth have been notably sluggish. From 2023 to 2025, the company's revenue growth rates were 0.86%, 5.4% and -8.46%, respectively, continuing to decline. Over the same period, the company's net profit attributable to shareholders growth rates were -10.01%, 0.54% and 8.5%, respectively, with growth momentum persistently insufficient. In the first half of this year, 37 Interactive Entertainment's revenue decline further widened from 8.08% in the same period last year. Although the company's net profit attributable to shareholders rose sharply year-on-year, it did not stem from an improvement in its core business, but was mainly affected by non-recurring gains and losses.

In the first half of this year, 37 Interactive Entertainment's total non-recurring gains and losses reached RMB 750 million, far higher than RMB 13.01 million in the same period last year. Among these, gains and losses from changes in fair value and disposal of financial assets reached RMB 986 million. According to the company's disclosure, this was mainly because during the reporting period, Beijing Zhipu Huazhang Technology Co., Ltd., in which the company invested through an associate, was listed, and changes in its share price led to an increase in the fair value change gains of the associate, increasing the investment income from the associate recognized by the company under the equity method. After excluding the impact of non-recurring gains and losses, the company's non-GAAP net profit in the first half actually fell sharply year-on-year.

It was noted that in the first half of this year, although 37 Interactive Entertainment's operating costs fell 17.1% year-on-year, gross profit still fell severely year-on-year. It is worth mentioning that over the past two years, 37 Interactive Entertainment has continued to reduce its selling expenses. In the first half of this year, the company's selling expenses fell 14.64% year-on-year. But even so, this indicator still reached as high as RMB 3.764 billion. The company's selling expense ratio and period expense ratio reached 51.75% and 60.6%, respectively, still at high levels. In the first half of this year, 37 Interactive Entertainment's period expenses decreased 11.07% year-on-year, less than the decline in revenue. High expenses continued to squeeze the company's profit margins.

In the most recent three interim reports, 37 Interactive Entertainment's non-GAAP net profit growth rates were 14.27%, 8.83% and -26.74%, respectively, showing a continuous downward trend, indicating that the company's core business profitability has continued to deteriorate.

Core Mobile Game Business Revenue Continues to Shrink

From the perspective of its main business, 37 Interactive Entertainment is facing the dual challenges of intensifying domestic stock competition and pressure on overseas growth. Data show that in the first half of this year, the actual sales revenue of the domestic game market grew 12.17% year-on-year; the actual sales revenue of China's self-developed games in overseas markets grew 30.22% year-on-year; and the sales revenue of the domestic mini-program game market grew 36.01% year-on-year. However, 37 Interactive Entertainment was unable to fully enjoy the dividends of industry growth.

In the first half of this year, its core mobile game business achieved revenue of RMB 7.115 billion, accounting for 97.8% of revenue, down 13.65% year-on-year, further widening from the 8.03% decline in the same period last year. The gross margin of this business edged up 0.38 percentage points year-on-year to 77.81%. Regarding the revenue decline in the first half, 37 Interactive Entertainment explained in its financial report that it was mainly due to the natural decline in the life cycle of some mature game products, while newly launched games were still in the promotion period and their revenue contribution had not yet stabilized.

In fact, 37 Interactive Entertainment's difficulties are not short-term fluctuations. Its mobile game business revenue has fallen 20.58% compared with the high point for the same period in the first half of 2024. The gross margin of this business has also fallen 7.29 percentage points compared with its historical high for the same period. Behind this, in recent years, although the scale of the domestic game market has continued to expand, user growth has nearly stagnated. As the user dividend peaks, the industry's previous "buy-traffic-driven" model has become difficult to sustain. This places higher demands on game companies' refined operations capabilities and product innovation capabilities.

By region, in the first half of this year, 37 Interactive Entertainment's domestic business achieved revenue of RMB 4.254 billion, accounting for 58.47% of revenue, down 26.18% year-on-year, a sharp widening from the 9.03% decline in the same period last year. This business revenue has fallen 32.84% compared with the high point for the same period in the first half of 2024, and its gross margin of 77.61% has dropped 7.91 percentage points compared with the high point for the same period.

Going overseas was once regarded by Chinese game companies as a "second growth curve," but in recent years, overseas game markets have also faced many challenges, including weakened user willingness and ability to spend due to economic downturn, intensifying market competition, and rising traffic acquisition costs. In the first half of this year, 37 Interactive Entertainment's overseas business achieved revenue of RMB 3.021 billion. Although it grew 10.9% year-on-year, this was built on the basis of declines in the previous three consecutive interim reports. In the first half of this year, this business revenue showed a downward trend compared with the historical high for the same period in the first half of 2022, and its gross margin also decreased 5.33 percentage points compared with that time.

In the first half of this year, 37 Interactive Entertainment's overall gross margin was 77.47%, up 0.76 percentage points year-on-year, but down nearly 7 percentage points compared with the same period of 2022, the company's performance high point.

Sustainability of High Dividends Faces a Test

In the first half of this year, 37 Interactive Entertainment's operating cash flow also came under heavy pressure. The financial report shows that in the first half of this year, 37 Interactive Entertainment's net operating cash flow plunged 37.89% year-on-year to RMB 1.089 billion, far exceeding the revenue decline. According to the company's disclosure, this was mainly due to a decrease in cash received from the sale of goods and provision of services during the reporting period compared with the same period last year. In fact, in the most recent three interim reports, this indicator's year-on-year declines were 8.22%, 17.65% and 37.89%, respectively, with the decline widening period by period. Over the same period, the company's net profit attributable to shareholders all grew year-on-year. This divergence of "profit up, cash flow down" undoubtedly indicates that the cash content of 37 Interactive Entertainment's profit has continued to decline, and there are certain hidden concerns about earnings quality.

As of the end of the first half of this year, 37 Interactive Entertainment's book monetary funds fell to RMB 3.83 billion, a new low for the same period in nearly six years. It was noted that even so, 37 Interactive Entertainment's dividend intensity in the first half of this year remained considerable. This year the company continued to implement its "installment dividend" policy. Among these, in the first quarter the company implemented a dividend plan of cash dividends of RMB 2.1 per 10 shares, including tax, distributing total cash of about RMB 462 million. The company's interim dividend implemented a plan of cash dividends of RMB 1 per 10 shares, including tax, with expected cash distribution of about RMB 220 million. In the first half of this year, 37 Interactive Entertainment distributed total dividends of about RMB 682 million, accounting for 38.6% of the company's net profit attributable to shareholders for the same period.

37 Interactive Entertainment's actual controller and chairman Li Weiwei holds 14.61% of the company's shares, vice chairman and general manager Zeng Kaitian holds 11.14%, and vice chairman Hu Yuhang holds 9.11%. These three are the company's top three shareholders, with a combined shareholding ratio of 34.86%. Based on this estimate, the three could receive total dividends of about RMB 238 million in the first half of this year. Relevant industry insiders believe that against the backdrop of a sharp decline in operating cash flow and weakening cash-generating capacity of the core business, 37 Interactive Entertainment still maintained a relatively high dividend ratio in the first half of this year. Although this strategy helps boost market confidence, its sustainability also needs to be watched.