Key Highlights: In H1 2025, XD INC achieved revenue of RMB 3.082 billion (+38.8% YoY), driven primarily by dual growth engines of gaming and TapTap businesses. The company recorded gross profit of RMB 2.253 billion (+50.5% YoY), representing a gross margin of 73.1%. This improvement was mainly attributed to the strong overseas performance of "Ragnarok M: Love at First Sight," with net-based gaming revenue accounting for 13.9% of total game operation revenue (+9.3pct YoY), leading to an 8.1pct YoY increase in gaming business gross margin to 68.0% and a 1.1pct YoY increase in TapTap business gross margin to 83.6%. Net profit attributable to shareholders reached RMB 755 million (+268.0% YoY), corresponding to a net margin of 24.5%.

Gaming Revenue Exceeds Expectations Led by Ragnarok M, Focus on Aether's Domestic Launch Performance. H1 2025 gaming business revenue reached RMB 2.071 billion (+39.4% YoY), with game operation revenue at RMB 2.045 billion: 1) Online game revenue of RMB 1.982 billion (+39.0% YoY), primarily from increased revenue from self-developed games including "Ragnarok M: Love at First Sight," "My Town," and "Torchlight: Infinite." Average MAU for online games increased 19.7% YoY, while average MPU grew 21.1% YoY. Regarding legacy games: The top three revenue-contributing games in H1 2025 were "Muffin Knight," "My Town," and "Ragnarok M." "Muffin Knight" has completed launches in major global markets and is now in its mature phase. "My Town" received team reinforcements in H1 2025 with several updated versions released, planned for overseas market launch in early 2026. "Ragnarok M" launched in mainland China in January 2017, with the Love at First Sight server launching in mainland China in April 2024, and subsequently launching in Southeast Asia in February 2025 and Hong Kong, Macau, and Taiwan in April 2025. For new games: "Aether" officially launched internationally on June 5, reaching top three on iOS free charts in multiple countries including the US, France, and Germany on its first day. "Aether" is scheduled for global multi-platform launch on September 25, featuring gameplay mechanics similar to "Summoners War-like" card battles with long-term update potential. The company continues investing in game R&D, with 745 game development personnel as of H1 2025, an increase of 21 from the previous quarter. 2) Premium game revenue of RMB 63 million (+14.2% YoY), mainly driven by "The Scroll Of Taiwu" and "Totally Accurate Battle Simulator," with upcoming mobile and PC versions of "Volcano Princess" and the dual-platform version of "Dave the Diver" in the pipeline.

TapTap Revenue Growth Exceeds Expectations, Primarily Driven by Commercialization Efficiency. In H1 2025, TapTap advertising revenue reached RMB 1.011 billion (+37.6% YoY). The Chinese version MAU was 43.6 million (+0.9% YoY). Revenue growth was mainly attributed to advertiser revenue growth (increased industry competition), TapTap algorithm improvements, and increased ad impressions (the company did not add new ad positions; impression growth mainly came from increased DAU, average ad viewing frequency, or duration). On the product side, the company promoted more games to integrate TapSDK and ecosystem services, achieving interconnectivity between accounts, games, and data. User-accumulated data feeds back into the community, promoting differentiated content creation, and AI assistant modules have been added to TapTap. Additionally, TapTap PC version was officially released in April 2025, focusing on serving core PC gamers.

Profit Forecasts, Valuation, and Rating: Strong performance from new games and good performance from updated legacy games validate the company's long-term game operation capabilities, with TapTap revenue growth exceeding expectations. Considering the improvement in gaming business gross margins driven by self-developed game development, enhanced TapTap commercialization efficiency, and relatively restrained marketing investments, we raise our net profit forecasts for 2025-2027 to RMB 16.9/20.7/23.8 billion (+52.0%/+51.4%/+69.6% vs. previous forecasts). We maintain our "Buy" rating.

Risk Warnings: TapTap commercialization falling short of expectations; new game performance falling short of expectations; advertiser budget tightening.