Goldman Sachs has released a research report upgrading XD INC (02400) to a "Buy" rating while lowering its 12-month target price based on the sum-of-the-parts (SOTP) valuation method from HK$66.8 to HK$60.7. The firm believes the company is poised for a growth inflection point and a shift in its investment narrative starting from the second half of 2026, despite downward revisions to earnings forecasts following the first half of 2026 results, with the current valuation remaining at historic lows.
TapTap Business Shows Gradual Recovery, Long-Term Monetization Potential Yet to Be Unlocked
The firm considers XD INC's TapTap platform to remain a unique game distribution platform for both players and developers. In an era of increasingly abundant game supply, aided by AI creation tools and a larger number of approved game licenses, the platform's value is expected to gain greater market recognition. Initiatives such as the TapTap PC version and "Made by TapTap" should strengthen the community ecosystem, expand the user base, and generate new revenue streams over the long term. In the first half of 2026, the company's income statement was affected by increased AI spending and traffic competition between AI-created games and commercial games. However, as the company redirects traffic and focuses on monetization, along with progress on "Made by TapTap" (an AI game development tool), the firm believes the platform will become a crucial channel for game creation, testing, and distribution in the industry, as well as a growing player community. The company's more stable game portfolio also enhances its earnings visibility. Goldman Sachs looks forward to a recovery inflection point in TapTap's advertising business, with its long-term monetization potential yet to be released, while expecting stable operating profit growth through better management of expenses and AI spending.
Game Revenue Growth Expected to Accelerate in the Second Half of 2026
Goldman Sachs projects that XD INC's game revenue growth will accelerate from 12% year-over-year in the first half of 2026 to 21% in the second half, mainly supported by incremental contributions from the overseas version of Heartbeat Town. Currently, Heartbeat Town and Torchlight: Infinite together account for approximately 70% of the company's game revenue. The firm believes these two games provide a relatively solid foundation for the company's game business. Looking ahead to 2027 and beyond, the company plans to conduct a second round of testing for Ragnarok 2 by the end of 2026, with a tentative launch in the first quarter of 2027, subject to test results. Departure with Muffin 2 is initially planned for release in the fourth quarter of 2027, and the company also has other self-developed games in the pipeline. Goldman Sachs believes the company's current, more stable game portfolio supports sustainable growth.
Operating Profit Growth Poised to Resume, Net Profit Still Affected by Tax Factors
In the near term, the firm sees tax-related issues, including back taxes and a higher effective tax rate, as headwinds to net profit. However, this factor should have been digested by the market after the recent share price correction. With low investor expectations and earnings forecasts having been cut by nearly 20% year-to-date, the firm believes forecasts have bottomed out, with potential upside stemming from improved TapTap monetization and traffic growth, as well as the launch of Ragnarok 2 in early 2027. Driven by incremental contributions from the overseas version of Heartbeat Town, the gradual recovery of the TapTap business, stricter operating expense controls, and a lower comparison base, the company is expected to see a year-over-year inflection point in both revenue and operating profit in the second half of 2026.
2026-2028 Revenue and Net Profit Forecasts Revised Downward
Year-to-date, the company has repurchased a total of HK$800 million in shares, representing over 4% of its current market capitalization. Management has indicated it is considering a new buyback plan, which, though not yet confirmed, should provide downside support for the share price. The stock currently trades at a 12-month forward price-to-earnings ratio of under 10 times, marking XD INC's lowest level in its history and well below the 14 times average for internet companies covered by the firm. Goldman Sachs views this as an attractive entry point and has raised its rating to "Buy". Given underperformance of legacy games and weaker-than-expected TapTap monetization, the firm has lowered its 2026-28 revenue forecasts by 3%-5% and its 2026-28 net profit forecasts by 10%-15%, primarily reflecting the slowdown trend in the gaming industry, back taxes, and a higher effective tax rate. Compared to market consensus, the firm's 2026-27 net profit forecasts are 6% higher than Visible Alpha consensus estimates.
Future Catalysts
1) TapTap: "Made by TapTap" produces more hit games, TapTap user base expands, and rapid development of the TapTap PC platform; 2) Games: Testing and release of Ragnarok 2 (scheduled for the first quarter of 2027) and upgrades of Heartbeat Town in both domestic and overseas markets.
Key Risks
Legacy games underperforming expectations and weaker-than-expected sustainability of Heartbeat Town revenue; slower-than-expected progress in TapTap commercialization; deterioration in the balance between long-term revenue growth and operating expenses, especially unreasonable increases in R&D and sales & marketing expenses, which could lead to margin contraction.