XD Inc. 1H26 quick take: results came in below Street expectations, as the biz hit a trough in the game release cycle and stepped up TapTap AI spending. With revenue growth slowing, core margins also slipped slightly.
H2 should see a natural recovery on an easier base and continued international rollout of 'Ragnarok Beginner's Server' in Japan/Korea. A return to strong growth still hinges on new titles; with three projects in the pipeline, the next product cycle is likely to start next year.
1) Game growth slowed; next cycle starts next year
Game revenue reached RMB 2.3bn in 1H26, up 12% YoY, but growth slowed QoQ off last year's high base. Contributors were the international performance of 'XD Town' and resilient 'Torchlight' as the floor. New titles included 'Resonance of the Star Mark' launched last Dec and premium title 'Dave the Diver'.
On the positive side, player counts and ARPPU were stable to slightly higher, indicating limited core user churn. Deferred revenue was RMB 290mn at end-1H; implied billings grew 16%, outpacing recognized revenue.
'Ragnarok Beginner's Server' may continue to expand internationally in H2 as the base eases. The key watch is 'Ragnarok RO 守爱 2', with performance after next year's open beta.
2) Ad revenue declined: lack of new hits, deliberate traffic allocation, and a high base
TapTap ad revenue was under RMB 1bn in 1H26. It fell 1% YoY.
On one hand, last year's base was elevated by several casual-game hits that spent heavily on UA, and XD had no blockbuster domestic launches in 1H to pull TapTap traffic, weighing on overall exposure. This also dampened platform-wide traffic.
On the other hand, XD rolled out TapTap Maker, a conversational AI game-creation agent. Over 6,000 games have been created via Maker and published on TapTap, receiving some internal traffic tilt, which affected TapTap's monetization.
3) Profit under dual pressure, down YoY
As net profit includes non-recurring items unrelated to core ops, we focus on core operating profit (GP minus SG&A/R&D). This better reflects underlying performance.
With top-line growth slowing, AI-related R&D in TapTap Maker and 'Cindy' weighed on profit, alongside incremental amortization from acquiring the 'Torchlight' IP. Core operating profit fell 6.2% YoY in 1H26; margin decreased by 2pct YoY and 5pct QoQ.
4) Most negatives are priced in
The current market cap is ~HKD 21bn (RMB ~18bn). On our FY26 core operating profit estimate of RMB ~1.8bn (below pre-report Street consensus of ~RMB 2.0bn) and an effective tax rate of 15%, P/E is under 12x, implying limited TapTap premium vs. game peers. Further downside looks limited; trading opportunities likely emerge in Q4 or near year-end as the new cycle approaches, supporting sentiment. $XD INC(02400.HK)