XD Inc.: To justify its premium, TapTap must step up

At mid-day on Mar 27 Beijing time, $XD INC(02400.HK) released its FY2025 results. As management had issued a profit alert in early Mar, the headline takeaway is earnings came in above guidance.

BBG consensus lagged and did not fully capture post-alert estimate revisions by the Street. Absolute forecast deltas are negligible; on margins alone, results beat, driven by tighter cost control and opex discipline.

Setting expectations aside, Dolphin Research is not satisfied with TapTap’s sharp growth deceleration in 2H. TapTap is the core of the equity story at the current valuation ( PE on post-tax OP at 16x, above HK gaming peers, implying an embedded TapTap premium ). Therefore, while 2H profit beat was delivered via cost cuts and efficiency gains, it is not enough to drive a meaningful re-rating.

TapTap’s user growth slowed markedly this year, likely due to the lack of a big DAU driver like last year’s self-published/solo-title ‘Dream Town’. The QoQ slowdown in ad revenue in 2H raises the question of whether ad monetization has reached a near-term ceiling.

Looking ahead, the company either needs new game launches to reignite platform traffic, or to open up new revenue streams beyond ads. To see a clear valuation uplift from these vectors, more evidence is still needed:

1) Two in-house titles are in the pipeline, likely including ‘Ragnarok: Love At 守爱 2’. As a long-cycle sequel to a well-known IP, it could bring back some users. In parallel, deeper operations of ‘Dream Town’ Intl version should help retention, but a sustained and visible MAU lift will still hinge on breakout new games, as seen in 2024.

2) On monetization, TapTap launched an AI game-creation agent—TapTap Maker—in Jan, now in invite-only testing. Near-term user feedback and whether it can drive incremental monetization will be key.

On shareholder returns, the company opted not to declare a dividend this year (vs. HK$0.4/share last year, ~HK$200 mn outlay). This may relate to its buyback plan announced early in the year for HK$400 mn over six months. If buybacks run at the same pace (supported by RMB 3.8 bn net cash), the annual shareholder yield would be ~2.5%, modest but still notable for a small/mid-cap.

In detail: The following sections outline growth, gaming trends, profitability, and vs. expectations.

1. TapTap growth slowdown: Domestic MAUs rose slightly in 2H, but revenue performance in the seasonally strong Q3 lagged 1H, with growth slowing from 38% to 13%. Likely drivers include softer user growth in 1H, budget cuts at certain advertisers, and heightened traffic-channel competition.

That said, 2H MAU net adds appear robust on an annual Avg. basis, likely helped by the launch of TapTap mini-games in Jul last year. This year, we will watch whether ‘Dream Town’ Intl and ‘Ragnarok: Love At 守爱 2’ can sustain user expansion to underpin TapTap’s ad value.

2. Games declined YoY on a high base: Game revenue fell 11% YoY in 2H, mainly on fewer active players. ‘Etheria’ China server was the key 2H launch and initially saw a decent start, but retention faded quickly amid competition; management now sees it as a mature title.

The 2026 pipeline centers on ‘Dream Town’ Intl and ‘Ragnarok Online: Love At 守爱 2’, plus one title in development. ‘Dream Town’ Intl launched in Jan. Given ‘Ragnarok’ is a long-cultivated premium IP for the company and the new title is a 3D open-world MMO, first-year TTM bookings could potentially top RMB 2 bn. The first closed beta was at end-2025, so launch is likely around mid-year, assuming a typical test-to-launch cycle.

Among live titles, ‘Torchlight’ follows a seasonal, competitive model, so bookings could stay stable or rebound. Post IP acquisition, global promotion and operations should be more streamlined, enhancing the IP’s reach.

3. Cost-out and efficiency beat: Profitability was the highlight, with 2H core OP margin at 31%, up 3ppt vs. 1H. GPM contributed +1ppt as TapTap, a higher-margin mix, rose as a share of revenue.

Opex optimization contributed +2ppt, led by G&A—down 32% YoY, a ~5ppt benefit, partly from lower management incentives. We expect gaming GPM to see modest tailwinds from Apple fee adjustments (XD’s iOS distribution mix is below industry given TapTap contribution) and lower rev-share after acquiring the Torchlight IP, offsetting domestic rev-share for ‘Ragnarok: Love At 守爱 2’.

4. Metrics vs. Street

(BBG consensus below lags; sell-side models were updated after the early Mar alert.)

Financial metrics and charts

Dolphin Research on XD Inc. (history):

Earnings season

Aug 29, 2025 conference call Trans: ‘XD Inc. (Minutes): Overseas breakout fueled by a key partner’s return’

Aug 29, 2025 earnings take: ‘XD Inc.: Surprise hits in games, TapTap accelerates monetization’

Risk disclosure and statement:Dolphin Research disclaimer and general disclosure