Stock Analysis & Valuation XD Inc. (2400.HK)

• Previous Close: HK$85.95
• Sector Valuation Confidence Level: Low

Valuation method	Value, HK$	Upside, %
Artificial intelligence (AI)	79.20	-8
Intrinsic value (DCF)	591.39	588
Graham-Dodd Method	14.60	-83
Graham Formula	99.40	16

Strategic Investment Analysis

Company Overview

XD Inc. (2400.HK) is a prominent Chinese mobile and web game developer and publisher headquartered in Shanghai, operating globally with a diversified portfolio of gaming content. The company develops, publishes, and operates both online and premium games, maintaining a portfolio that included 38 games as of December 2021. Beyond game development, XD Inc. operates TapTap, a significant gaming platform that connects gamers and developers, providing community engagement and information services. Operating in the competitive electronic gaming and multimedia sector, XD leverages China's massive gaming market while expanding internationally. The company represents China's growing influence in the global gaming industry, combining content creation with platform services to create a comprehensive gaming ecosystem. With its dual focus on game production and platform operation, XD Inc. positions itself at the intersection of content and community in the rapidly evolving digital entertainment landscape.

Investment Summary

XD Inc. presents a mixed investment profile with several attractive fundamentals offset by sector-specific risks. The company demonstrates solid profitability with net income of HKD 811.5 million on revenue of HKD 5.01 billion, representing healthy margins. Strong operating cash flow of HKD 1.28 billion and substantial cash reserves of HKD 2.78 billion provide financial stability and flexibility for growth initiatives. However, the high beta of 1.492 indicates significant volatility relative to the market, reflecting sensitivity to regulatory changes in China's gaming sector and competitive pressures. The gaming industry faces ongoing regulatory scrutiny in China, particularly around playtime restrictions and content approval, which could impact growth prospects. The company's international expansion and TapTap platform diversification provide some hedge against domestic regulatory risks, but investors should remain cautious about the volatile nature of game hits and the competitive mobile gaming landscape.

Competitive Analysis

XD Inc. operates in a highly competitive mobile gaming market where success depends on hit game development, effective user acquisition, and platform ecosystem building. The company's competitive advantage stems from its dual business model combining game development with the TapTap platform, which creates synergies between content creation and distribution. TapTap provides valuable user insights, community engagement, and a distribution channel that reduces reliance on third-party app stores. XD's portfolio of 38 games demonstrates content diversification across both online and premium models, reducing dependency on any single title. However, the company faces intense competition from larger Chinese tech giants with greater resources for user acquisition and game development. The mobile gaming market is characterized by high user acquisition costs and the fickle nature of game popularity, requiring continuous investment in new content. XD's smaller scale compared to industry leaders like Tencent and NetEase means it must compete through niche positioning and platform differentiation rather than sheer market power. The company's international expansion provides growth opportunities but also exposes it to competition from global gaming giants in overseas markets.

Major Competitors

• Tencent Holdings Limited (0700.HK): Tencent is the dominant player in China's gaming market with massive resources, popular franchises like Honor of Kings and PUBG Mobile, and ownership of WeChat providing unparalleled user acquisition advantages. Their strengths include vast financial resources, extensive game portfolio, and integrated ecosystem across social, payment, and gaming platforms. Weaknesses include regulatory scrutiny and dependence on hit titles. Compared to XD, Tencent has significantly larger scale and market power but faces greater regulatory attention.
• NetEase, Inc. (9999.HK): NetEase is China's second-largest game company with strong PC and mobile game expertise, popular titles like Fantasy Westward Journey, and successful partnerships with Blizzard Entertainment. Their strengths include strong game development capabilities, diverse portfolio, and international partnerships. Weaknesses include reliance on key franchises and competition from Tencent. NetEase's scale and development resources exceed XD's, but XD's TapTap platform provides a differentiated ecosystem approach.
• Bilibili Inc. (BILI): Bilibili operates a video community platform with growing game publishing and development operations, particularly strong with younger demographics. Their strengths include engaged community ecosystem, content discovery platform, and strong brand among Gen Z users. Weaknesses include monetization challenges and high content acquisition costs. Unlike XD's focused game development, Bilibili's gaming business complements its broader video platform strategy.
• Zuora, Inc. (ZUO): While not a direct game developer, Zuora provides subscription management platforms that compete with aspects of gaming monetization infrastructure. Their strengths include enterprise subscription expertise and recurring revenue models. Weaknesses include niche market focus and competition from larger payment platforms. This represents indirect competition in the gaming ecosystem services space rather than direct game development competition.
• Sea Limited (SE): Sea operates Garena as its gaming arm, particularly strong in Southeast Asian markets with games like Free Fire. Their strengths include emerging market focus, successful battle royale title, and integrated digital ecosystem. Weaknesses include dependence on Free Fire and competitive pressure from larger players. Sea represents international competition in growth markets where XD may seek expansion.