CITIC Construction Investment has issued a research report stating that NetDragon (00777) delivered its 2026 interim results, showcasing notable progress in cost optimization and revealing a structural shift in operational quality and efficiency. The company's three main operating expenses dropped 17.8% year-on-year to RMB 1.11 billion, driving operating profit up 24.1% to RMB 144 million. First-half 2026 Non-IFRS net profit attributable to shareholders reached RMB 225 million, a 6.6% increase.

The gaming segment demonstrated remarkable resilience, anchored by its flagship evergreen IP. Monthly active users for the popular title "Eudemons Online" surpassed the 3 million mark, helping to lift segment revenue sequentially. The current valuation floor for NetDragon is supported by a total shareholder return program of no less than HK$600 million for the full year. Upside potential is tied to the option value embedded in its assets, including Rokid and Shuaiku, alongside the ongoing recovery of its core gaming operations.

CITIC Construction Investment believes the 1H26 results clearly validate the operating leverage generated by cost reduction initiatives and AI-driven efficiency. In the short term, the shareholder return scheme exceeding HK$600 million provides substantial downside protection, while potential listings of its portfolio assets serve as catalysts. Looking to the medium term, with expectations of stabilizing game revenue in the second half of 2026, Mynd.ai achieving EBITDA breakeven, and the 2027 education hardware replacement cycle approaching, NetDragon holds the conditions to transition from a "high-dividend defensive" play to one offering both earnings growth and valuation re-rating. The firm maintains a "Buy" rating on the stock.

Cost Optimization Delivers Results in 1H26 Results

In the first half of 2026, NetDragon reported revenue of RMB 2.09 billion and gross profit of RMB 1.461 billion, with gross margin expanding by 0.4 percentage points year-on-year to 69.9%. Total operating expenses, covering R&D, administration, and sales, amounted to RMB 1.11 billion, a reduction of 17.8% year-on-year. Operating profit reached RMB 144 million, up 24.1%, while net profit attributable to shareholders grew 20.0% to RMB 36 million. The Non-IFRS net profit attributable to shareholders stood at RMB 225 million, a 6.6% increase.

The board has approved an interim dividend of HK$0.50 per share. As of the end of June 2026, the company's net cash and liquid investment reserves totaled approximately RMB 1.8 billion.

Gaming Segment Shows Resilience with AI Boosting Efficiency

Revenue from gaming and application services reached RMB 1.6 billion in 1H26, up 3.1% sequentially. The flagship IP "Eudemons Online" displayed strong user retention, supported by campaigns to re-engage lapsed users and a "gaming plus tourism" initiative. The game's community average MAU surpassed 3 million, a 24.1% increase year-on-year and a 15.8% rise sequentially, marking its fifth consecutive half-year of sequential growth. This helped drive Eudemons IP revenue up 3.7% quarter-on-quarter. In overseas markets, "Conquest" saw a 19.3% increase in revenue year-on-year in USD terms, and "Heroes of Might and Magic" reported a 4.4% year-on-year revenue increase, extending its streak of positive annual growth to seven consecutive half-year periods.

Looking ahead, the company plans to launch additional multilingual and specialized versions in overseas markets during the second half, which is expected to drive continued sequential recovery in gaming revenue.

Meanwhile, the full deployment of AI across its operations and workforce optimization have reshaped the cost structure. Operating expenses for the gaming and application services segment fell 14.4% year-on-year to RMB 824 million in 1H26, with R&D expenses dropping sharply by 23.4% to RMB 334 million. Company filings show that AI employees now account for 35%–40% of total workload, with 269 AI-enabled positions already operational and dynamically scaled. The development cost for a single lightweight or native game has been compressed from tens of millions of RMB to approximately RMB 2 million.

The group's workforce has been streamlined to 2,557 employees, a net reduction of 504 people from the end of 2025, a 16.47% decrease within six months.

Management noted during the earnings call that the impact of AI on per-capita efficiency and costs is concentrated in the 2025–2026 period. From 2027 onwards, the pace of optimization is expected to slow, with the focus shifting towards higher game production capacity supported by modest cost increases, effectively unlocking operating leverage.

Mynd.ai Narrows Losses by Over 35%

For NetDragon's education subsidiary, Mynd.ai, gross margin improved by 2.3 percentage points year-on-year to 27.7% in 1H26. Operating expenses contracted significantly by 29.6% to RMB 254 million. The operating segment loss narrowed by 35.4% from RMB 195 million in 1H25 to RMB 126 million. Adjusted EBITDA losses shrank by 53.7% to RMB 63 million, while free cash outflow contracted by 38.8% year-on-year.

North American orders are showing signs of recovery. Management has guided for 10% revenue growth in 2H26 and a reduction in full-year operating expenses of more than 25%, with a clear aim to achieve EBITDA breakeven in the second half. At the industry level, following demand pulled forward during the 2021–2023 pandemic period, 2027 is expected to mark the start of a four-year natural hardware replacement cycle, presenting potential for profit release from a low cost base.

Event Catalysts and Asset Revaluation Potential

NetDragon's current investment portfolio includes stakes in Rokid and Shuaiku, among others. In the smart glasses space, Rokid's peer XReal submitted its listing application to the Hong Kong Stock Exchange in early April. Meanwhile, Rokid completed its joint-stock reform in March. While the founder has denied rumors of a 2026 IPO, the restructuring and capital increase still point towards a likely listing in 2026 or 2027. Drawing parallels with the earlier 91 Assistant case, a potential Rokid IPO could lead NetDragon to distribute a special dividend.

Shuaiku has also drawn recent market attention. It moved into new office premises in October 2025, expanded its live-streaming studio count to around 100, and received further resource support from the Douyin platform. Referencing peers like Wuyi Media, this asset provides additional valuation support for NetDragon.

Record Shareholder Returns Reinforce a Solid Valuation Floor

For 1H26, NetDragon declared an interim dividend of HK$0.50 per share, amounting to HK$263 million. The company is actively executing its shareholder return program of no less than HK$600 million, implying a total shareholder return yield of over 13% based on the current market capitalization of approximately HK$4.4 billion. Continuous share purchases by the chairman and employee buybacks further solidify the valuation floor.

Investment Thesis and Valuation

Based on a Sum-of-the-Parts (SOTP) valuation, CITIC Construction Investment applies a 7x P/E multiple to the gaming and application services business, a 6x P/E to the steady-state net profit of its private higher education business, and conservatively values Mynd.ai at approximately HK$137 million based on its US market value and a 70% stake. Pre-IPO equity investments, including Rokid and Shuaiku Network, are valued based on the latest primary market valuations and shareholding ratios, incorporating expectations of potential special dividends post-IPO. Overall, the SOTP valuation implies a Non-IFRS P/E of 8.6x for NetDragon.

The broker sets a target price of HK$11 and reiterates a "Buy" rating.