CITIC Construction Investment: NetDragon (00777) Organizational restructuring and AI efficiency to deliver high dividends, underpins catalytic asset resonance and maintains a “buy” rating

CITIC Construction Investment released a research report saying that NetDragon (00777) released the 2026 interim report. The company achieved remarkable cost optimization results during the period, and there was a structural inflection point in operating quality and efficiency: the three operating expenses fell 17.8% year on year to 1110 million yuan, driving operating profit up 24.1% year on year to 144 million yuan, and 1H26 non-IFRS net profit to mother reached 225 million yuan (+6.6% year over year). Changqing IP, the flagship in the gaming sector, showed extreme resilience, and Magic Domain MAU surpassed 3 million to drive revenue recovery from month to month. Currently, NetDragon's valuation base is guaranteed by a total shareholder return of not less than HK$600 million for the whole year; upward flexibility relies on option values of assets such as Rokid/Shuaiku, and game business restoration.

NetDragon's 1H26 performance clearly confirms cost reduction and efficiency and the release of operating leverage brought about by AI empowerment. In the short term, the HK$600 million shareholder return plan provides an extremely high margin of safety, and the listing of assets in hand is a potential catalyst; in the medium term, as 2H26 game flow stabilizes, myND.AI achieves EBITDA balance, and the 2027 inflection point of education is realized, the company has sufficient conditions to evolve from “high dividend defense” to “double impact on profit and valuation” to maintain a “buy” rating.

CITIC Construction Investment's main views are as follows:

NetDragon released its 2026 interim report, with remarkable results in cost optimization

The company's 1H26 achieved revenue of 2,090 billion yuan, gross profit of 1,461 billion yuan, and gross margin increased 0.4 pct to 69.9% year on year; total operating expenses (R&D, administration, sales) of 1,110 million yuan (year-on-year decrease of 17.8%, significant cost optimization results), operating profit of 144 million yuan (+24.1% year over year), net profit to mother of 36 million yuan (+20.0% year over year), and 1H26 non-IFRS net profit to mother of 225 million yuan (+6.6% year over year). The Board of Directors approved an interim dividend of HK$0.50 per share. As of the end of June 2026, the total net cash and liquid investment reserves were close to RMB 1.8 billion.

The game business showed resilience, and AI reduced costs and increased efficiency to unleash medium-term profit potential

1H26 game and application service revenue reached 1.6 billion yuan (+3.1% YoY). The flagship IP “Magic Domain” showed strong user stickiness. Through historical user recalls and “Game+Cultural Tourism” linkage, the average community MAU exceeded 3 million (+24.1% YoY, +15.8% month-on-month increase for 5 consecutive years), driving Magic Domain IP revenue up 3.7% month-on-month; in US dollars, “Conquer”'s overseas revenue increased 19.3% year on year, and “Soul Slayer” mobile game revenue increased 4.4% year on year (7 and a half years of positive year-on-year growth). In the second half of the year, the company will promote the launch of overseas multi-language versions and special editions, which is expected to drive the game business to continue to recover month-on-month.

AI full-link deployment and personnel optimization and reconstruction cost curve

The operating expenses of the 1H26 game and application service category fell 14.4% year on year to 824 million yuan (of which R&D expenses fell sharply by 23.4% year on year to 334 million yuan). According to the company's financial report, the share of 1H26AI employees has increased to 35% to 40%. AI employees have launched 269 positions and achieved dynamic expansion, and the development cost of a single lightweight/native game has been reduced from 10 million yuan to about 2 million yuan. With the downsizing of the entire group's workforce to 2,557, there was a net decrease of 504 compared to the end of 2025 (16.47% reduction in personnel within half a year). The management revealed during the performance call that the impact of AI on labor efficiency costs was concentrated in 25-26, and the degree of optimization will gradually be reduced after 27 years, which is more reflected in the increase in game production capacity when costs increase slightly, which is also the operating leverage effect.

Mynd.ai reduced losses by more than 35%, and 2H26 is expected to achieve EBITDA break-even

1H26Mynd.ai's gross margin increased 2.3 percentage points year over year to 27.7%; operating expenses were drastically reduced by 29.6% year on year to 254 million yuan; operating classification losses narrowed sharply by 35.4% from 1H25's 195 million yuan to 126 million yuan; adjusted EBITDA losses narrowed 53.7% to 63 million yuan from 136 million yuan; and free cash outflows narrowed 38.8% year over year. Currently, there is an upward trend in North American orders. Management has guided 2H26's revenue target to increase by 10% year-on-year, and annual operating expenses to drop by more than 25%. 2H26 clearly aims to achieve EBITDA break-even. At the industry level, after experiencing an overdraft of the 2021-2023 epidemic, 2027 will usher in an inflection point in the 4-year hardware replacement cycle, and there is an opportunity to unleash profit flexibility under a low cost base.

In the future, there are some opportunities to catalyze events, that is, revaluation of investment assets

NetDragon's current investments include Rokid, Shuaiku, etc. Among them, the smart glasses Rokid colleague XReal submitted a statement to the Hong Kong Stock Exchange in early April, and Rokid completed the shareholding system reform in March. Although the founder denied rumors of a listing within the year, the stock reform+capital increase and stock expansion still reflect a probable IPO listing in 26-27. Referring to the previous case of 91 Assistant, if RokiDipo proceeds with the listing, the company may pay a special dividend. Shuaiku is also an investment asset that has received a lot of attention in the market recently. It moved into a new office space in October 2025, and the live broadcast room was expanded to about 100. The Douyin platform provided further resource support. Refer to peers such as Worry-Free Media. Subsequent valuations have had a supporting effect on NetDragon.

Shareholder returns reached a record high, and the company maintained a steady dividend payment policy

1H26 announced a 1H26 interim dividend of HK$0.50 (HK$263 million) per share; the company is actively implementing a shareholder return plan of not less than HK$600 million, with a total shareholder return rate of over 13% corresponding to the current market value of about HK$4.4 billion. The chairman's continuous increase in holdings and employee buybacks have further consolidated the bottom of the valuation.

Investment recommendations: Based on the SOTP valuation, game and application services are given 7x P/E, private colleges and universities are given a steady net profit of 6x P/E. Mynd.ai Education Technology is conservatively calculated at HK$137 million in strict accordance with the US stock market value and 70% holding ratio; pre-IPO equity investment (Rokid and Shuaiku Network) is included in the latest Tier 1 market valuation and shareholding ratio (implying expectations for special dividends after the IPO). Taken together, the SOTP NetDragon valuation corresponds to NonIFRS 8.6x P/E. The target price is HK$11, maintaining a “buy” rating.