NetDragon (00777) delivered a resilient performance in the first half of 2026, with core profits returning to double-digit growth and profitability improving significantly, while also exploring new growth avenues. According to the company's interim results released recently, revenue reached RMB 2.09 billion, with gaming and application services contributing approximately RMB 1.6 billion, reflecting a sequential increase. Gross profit stood at RMB 1.46 billion, with a gross margin of 69.9%, up 0.4 percentage points year-on-year. Operating profit climbed 24.1% to RMB 140 million, with an operating margin of 6.89%, an improvement of 2.0 percentage points compared to the prior year.

In the first half, the company deepened its "AI+" strategy across its dual pillars of gaming and education, maintaining operational resilience through this twin-engine approach and significantly enhancing earnings quality. Concurrently, NetDragon launched a new AI venture, "Muyu AI," which has officially entered testing in both domestic and international markets, opening up a fresh growth trajectory. The company also remains committed to shareholder returns, having announced in March a plan to deliver no less than HK$600 million in total shareholder returns over the next 12 months, and is steadily executing this commitment. Interim dividends of RMB 238 million, or HK$0.50 per share, have been declared, with the full-year shareholder return ratio projected to approach 15%. As of June 2026, the company held approximately RMB 1.8 billion in cash and liquid investments, providing ample support for business expansion, AI exploration, and the shareholder return program.

Comprehensive AI Strategy Sustains Resilience Across Dual Tracks

In the first half, NetDragon's two primary business segments demonstrated resilience under its comprehensive AI strategy. The gaming and application services segment showed signs of recovery, generating revenue of RMB 1.59 billion, a sequential increase of 3.1%, and accounting for 76% of total revenue. Mynd.ai contributed RMB 510 million, representing 24% of revenue. In gaming, strategic initiatives centered on deepening AI applications yielded positive results, with revenue recording a sequential uptick. With AI support, the company's flagship evergreen IPs have shown strong operational resilience. Notably, content output for Demon World increased by over 10% year-on-year, and the IP's average monthly active users surpassed 3 million, up 24.1% year-on-year and 15.8% quarter-on-quarter, marking the fifth consecutive half-year of sequential growth. This drove a 3.7% sequential revenue increase for the IP. Meanwhile, the Hero Soul IP saw PC game revenue grow 4.4% year-on-year, achieving its seventh consecutive half-year of growth, with a collaboration with the B.Duck IP attracting positive feedback from younger users and boosting overall net consumption by 37.1% quarter-on-quarter.

Looking ahead to the second half, the company plans to leverage AI to build a closed loop integrating content production and operations. It will continue to explore areas with knowledge accumulation, such as AI roguelike games, AI-powered cultural tourism, and AI short dramas. Additionally, utilizing its AI production line, NetDragon intends to expand multi-lingual versions of its Demon World and Hero Soul IPs for overseas markets, and launch several special editions for Demon World and Conquest. The company is also actively exploring a "gaming + cultural tourism" model, deepening collaborations with local tourism authorities to embed cultural content into gameplay, thereby enhancing user engagement and retention.

Meanwhile, its US-listed subsidiary Mynd.ai has been navigating industry adjustments effectively, reducing losses by more than 35% year-on-year. By integrating cutting-edge AI technologies from Merlyn Mind and Augment Me, Mynd.ai has improved the interactive experience across its hardware and software ecosystem in classroom settings. Additionally, through its services and SaaS business, it continues to build recurring revenue, which grew year-on-year. The company has launched the AP10 for the high-end market and a product portfolio targeting the value segment, with the AP LE primarily aimed at emerging markets outside the US. Over one million classrooms globally constitute a vast user base for the deployment of its AI services.

Pioneering New AI Business to Forge Future Growth

Beyond its two core tracks, NetDragon is venturing into new AI businesses to cultivate additional growth points within its application services. The self-developed Muyu AI, built on an AI Agent technological foundation, aims to create a multi-scenario AI application ecosystem, offering novel paradigms for work, learning, creation, and design. During the first half, Muyu AI underwent systematic optimization for specific AI application scenarios such as content creation and education, with continuous iteration and expansion of application scenarios. As an AI employee ecosystem platform, Muyu AI empowers various industries with a business model covering B2C, B2B, and B2G, and is fully adopted across the company's internal gaming and education sectors.

For instance, in gaming, 269 AI employee positions were launched in the first half, with AI employees' workload now accounting for 35-40% of total operations. Taking Hero Soul Pocket Edition as an example, AI employees can synchronously produce and deploy promotional materials for over 100 countries. In A/B tests against traditional manual teams, AI has already surpassed human performance in certain areas, identifying country-level opportunities overlooked by manual teams. Clearly, Muyu AI leverages its advantages in scenario resources and operations to distill data into industry knowledge, creating a "private domain moat" and continuously solidifying its core competitiveness. External market expansion will draw on successful experiences from the main tracks. With virtually no competitors in the market currently, customer reliance is high due to supply scarcity. The simultaneous advancement in both domestic and international markets could pave the way for a new growth curve.

Additionally, NetDragon's investment business is poised to enter a harvest phase. Focusing on the AI sector, the strategic collaboration between its subsidiary Charizard and Zhongke Wenge has deepened, with development underway for AI administrative management and customer relationship management applications for local enterprises in the Hong Kong and Macau markets. They are also co-developing a large model for scientific research, "Panshi," and the international version of "Longgong," an enterprise-level security Agent platform. These initiatives are progressing steadily, and their scaled commercialization is expected to contribute to performance growth.

Profitability Improves Significantly; Undervaluation and High Dividend Yield to Drive Re-rating

NetDragon's comprehensive AI strategy not only sustains business resilience and creates new growth opportunities but also enhances operational quality across the board, leading to significant profitability improvements. During the period, the gross margin stood at 69.9%, up 0.4 percentage points year-on-year, maintaining a steady upward trend. The gaming and application services segment maintained a high gross margin exceeding 80%, while Mynd.ai's gross margin improved by 2.3 percentage points to 27.7%. With Muyu AI fully applied to enhance efficiency across both tracks, operating expenses fell approximately 18% year-on-year in the first half. Net profit attributable to shareholders grew 20%, with adjusted shareholder net profit reaching RMB 250 million, maintaining a stable financial performance.

By segment, gaming and application services operating expenses decreased 14.4% year-on-year, including a 23.4% reduction in R&D expenses, primarily driven by the AI employee matrix significantly improving efficiency across R&D, operations, and maintenance. Segment operating profit reached RMB 461 million, marking the second consecutive half-year of sequential growth. Mynd.ai showed marked improvement in profitability, with operating expenses down 29.6% during the period. All three expense ratios improved: sales expenses fell 1.1 percentage points, R&D expenses fell 1.37 percentage points, and administrative expenses fell 3.56 percentage points, leading to a 35% narrowing in segment operating losses and a 30.8% reduction in net losses. Adjusted EBITDA improved significantly by 53.7%, with breakeven potentially achievable in the second half of the year.

In summary, NetDragon presents three key highlights. First, AI empowerment is progressively releasing value: the gaming and application services business is growing sequentially, flagship IPs are performing strongly, and the education business is advancing its transformation to improve operational quality. Second, cost reduction and efficiency gains are substantial, with both primary tracks benefiting from optimized expenses and significantly enhanced profitability. Third, new growth variables are emerging: the launch of Muyu AI, transitioning from internal application to external productization, is set to reshape the growth engine. Currently, NetDragon trades at a low valuation with a PB ratio of only 0.7 times and a shareholder return ratio close to 15%. As the main tracks recover and new growth variables begin to contribute, the valuation is poised for re-rating.