If 37 Interactive Entertainment were to be described using gaming terminology, it would be "too cautious, so all its attributes are in defense."

Steadiness is the most prominent feature of 37 Interactive Entertainment's market performance.

When discussing the current gaming market, several keywords are repeatedly discussed as trends, such as mini-games, AI, overseas markets, cross-platform compatibility, etc.

Remarkably, 37 Interactive Entertainment has embraced almost all these trends. It's important to emphasize that this isn't just a conceptual nod; they have tangible achievements to show for it.

37 Interactive Entertainment's steady market performance is evident in its consistent revenue growth. In 2023, the company achieved total revenue of 16.55 billion yuan, with net profit attributable to shareholders reaching 2.66 billion yuan and overseas revenue exceeding 5.81 billion yuan. Although growth in the first half of 2024 was slightly lower than Shiji Huatong, 37 Interactive Entertainment maintained a steady development trajectory and led the market alongside Shiji Huatong.

In the third quarter, the company's newly launched game "Time General Store" continued to perform well, peaking at #22 in rankings, potentially succeeding the popular game "I Am the Manager" and contributing significantly to financial results.

If 37 Interactive Entertainment has a weakness, it might be that it has yet to launch a product with high DAU, contributing to its relatively low P/E ratio among A-share gaming stocks.

This situation is actually a rational strategic choice based on the company's realities.

Ultimately, analyzing a gaming company comes down to its products.

Since 2019, 37 Interactive Entertainment has prioritized strategic transformation, shifting from heavy reliance on publishing to an integrated model of research, development, and operation.

Although aiming to gradually reduce reliance on heavy publishing, publishing remains a core competency of 37 Interactive Entertainment, enabling precise market insights, selection of quality products, and broad market coverage through efficient marketing strategies.

According to 37 Interactive Entertainment's 2024 Half-Year Report, sales and marketing expenses amounted to 5.36 billion yuan in the first half, up 25.26% year-on-year. Internet traffic costs accounted for most of this, reaching 5.04 billion yuan, up 26.38% YoY, setting a new record for the company and leading the industry.

Games launched under these conditions may compromise on innovation and long-term goals but still offer substantial initial appeal. Games like "I Am the Manager" and "Time General Store" provide diverse gaming experiences through multi-gameplay integration early on.

However, as games progress, these products often revert to uniform numerical growth models, quickly exhausting player interest but effectively raising ARPPU to desirable levels. This strategy ensures profitability for most 37 Interactive Entertainment games, varying only in profit margins.

Since 2019, 37 Interactive Entertainment has significantly increased R&D investment and consistently emphasized the importance of in-house development in its earnings calls, indicating awareness of the limitations of its current model.

Companies facing such dilemmas often undertake drastic transformation measures to escape awkward positions. While this may lead to swift transformation, it also entails high risks.

However, 37 Interactive Entertainment's transformation has benefited from three favorable factors, significantly extending its transition buffer period. This provides more time to optimize product strategies and achieve a smoother transition.

Firstly, overseas market expansion is crucial. A popular saying in the gaming industry is "Go overseas or get left behind," underscoring the importance of international markets. In the first half of this year, Shiji Huatong surpassed 37 Interactive Entertainment in growth, largely due to its sudden surge in overseas markets. Its top mobile game publisher, Diandian Interactive, contributed nearly half of Shiji Huatong's total revenue and over 50% of net profit, becoming a significant earnings pillar.

Returning to 37 Interactive Entertainment, as one of the earliest Chinese game developers to enter overseas markets in 2012, it has accumulated rich R&D and operational experience. This enables precise targeting of core user preferences and experiences. Overseas expansion has helped 37 Interactive Entertainment avoid fierce domestic competition, maintain healthy cash flow, and secure funding and time for transformation.

According to Data.ai's 2023 list of the world's top 50 publishers, 37 Interactive Entertainment ranks 20th globally and fourth among Chinese publishers, after Tencent, ByteDance, NetEase, and miHoYo.

Specifically, 37 Interactive Entertainment's success stems from the stable performance of hit games like "Puzzles & Survival" and "Call Me Manager."

"Puzzles & Survival," with its unique "match-3 + SLG" gameplay, has become a phenomenon in overseas markets, topping charts in multiple countries and demonstrating strong profitability. As of February this year, its cumulative revenue exceeded 10 billion yuan, with its Kung Fu version highly praised by overseas players.

"Call Me Manager" maintained excellent performance in multiple overseas regions through a series of collaborative events and localized publishing strategies, even setting new records for ancient-themed management games in Europe and the Americas.

Another positive factor stems from the rapid development of AI technology in recent years. In gaming, AI's value lies in enhancing gameplay experience, particularly in open-world and simulation genres, where it significantly improves realism and immersion.

Crucially, AI also boosts productivity, reducing costs and accelerating development cycles (cost reduction and speedup). For companies like 37 Interactive Entertainment adept at seizing market opportunities, this productivity leap is vital, effectively extending the lifespan of heavy marketing models and buying time for transformation.

Since 2018, 37 Interactive Entertainment has actively explored AI's application in game industrialization, successfully developing nine in-house platforms to establish a comprehensive game industrialization system. For instance, the company's self-developed art design platform "Turing" facilitates collaborative art processes, art asset management, and intelligent 2D image generation, significantly boosting efficiency. Currently, monthly AI-generated 2D artwork across business lines exceeds 280,000 pieces, saving 60%-80% of time in character concept art stages.

Lastly, the mini-game market is another positive factor. Heavy marketing models struggle to sustain due to monotonous gameplay and reliance on paid growth, leading to player churn and rising acquisition costs. Thus, exploring new markets is crucial. Since 2023, the mini-game market has garnered attention as a new growth point. At the 2024 WeChat Mini-Game Developers Conference, official data revealed a broad user base with limited gaming exposure, offering vast potential for the mini-game market.

37 Interactive Entertainment seized this opportunity, shifting focus to mini-games. In WeChat's top 100 mini-game sales rankings, 37 Interactive Entertainment boasts nearly 10 titles, including the phenomenal "Search for the Dao," which topped charts for extended periods, generating nearly 500 million yuan in monthly revenue. The company also has a rich game pipeline, including "Time General Store," recently launched and rapidly climbing rankings, currently in the top 7 and still rising.

Several factors contribute to 37 Interactive Entertainment's extended transformation period. High DAU games are a notable weakness. In terms of both production experience and revenue models, these games deviate from 37 Interactive Entertainment's traditional approach.

While high DAU games are widely seen as the future, no clear path or methodology has emerged. Thus, 37 Interactive Entertainment's entry into this domain could be seen as risky.

High DAU games serve as an important metric during 37 Interactive Entertainment's transformation. With forward-thinking strategies and rational product layouts, 37 Interactive Entertainment aims to secure a top-tier position in the industry post-transformation, driven by high DAU products rather than heavy marketing models.