Where to focus your attention
The company Kingnet Network Co.,Ltd. (002517.SZ) needs to prove to the market that its earnings quality extends beyond one-time gains and aggressive ad spending. Without convincing evidence that product and R&D can drive sustainable growth, even impressive headline numbers may fail to win over cautious investors. This is the core challenge facing the firm.
Why the stock’s valuation remains low despite strong growth
At the end of April 2026, Kingnet Network Co.,Ltd. reported a seemingly strong first-quarter performance. Revenue reached 2.221 billion yuan, a 64.19% increase year-over-year, while net profit attributable to shareholders hit 781 million yuan, up 50.65%. By mid-July, the company had forecasted a 37% to 64% increase in net profit for the first half of the year. These figures suggest the veteran gaming firm is enjoying its best period in years. However, the capital market has not responded with similar enthusiasm. The company’s dynamic price-to-earnings ratio has lingered between 11 and 15 times, significantly below the 20-plus times valuations of peers like 37 Interactive Entertainment, Gbit, and Perfect World.
The market’s cautious stance is not without reason. A deeper look at the financial report reveals that the high growth is inflated by one-time gains, soaring marketing expenses, and heavy reliance on a single IP. Additionally, a massive arbitration claim of 7.662 billion yuan looms over the company. The true picture of Kingnet Network Co.,Ltd. is far less rosy than the income statement suggests.
One-time gains propping up profit growth
First, consider the quality of profits. In the first quarter of 2026, Kingnet Network Co.,Ltd. reported net profit attributable to shareholders of 781 million yuan, a growth rate exceeding 50%. However, after deducting non-recurring items, net profit was only 545 million yuan, with the growth rate sharply declining to 5.75%. The gap of nearly 235 million yuan between these two figures is primarily due to the full settlement of the Legend IP series of lawsuits. In other words, nearly 30% of the first-quarter profit came from legal settlements, not from core gaming operations. Such gains are non-recurring and cannot be repeated, making the high growth a one-time feast.
Looking back at the previous reporting period, the slowdown in the core business becomes more apparent. For the full year of 2025, Kingnet Network Co.,Ltd. generated revenue of 5.325 billion yuan, a mere 4.04% increase. This was a sharp decline from the 19.16% growth rate in 2024, indicating a significant deceleration in the company’s core gaming business revenue growth. The 64% revenue surge in the first quarter of 2026 may be influenced by a low base in the same period last year, as well as contributions from newly consolidated and platform businesses, raising questions about its sustainability.
The divergence between profit and cash flow is also a red flag. In the first quarter of 2026, the company’s net cash flow from operating activities was 428 million yuan, a 9.56% increase year-over-year. This figure is not only far below the net profit of 781 million yuan but also significantly lower than the profit growth rate. The gap between book profit and actual cash generation is partly explained by rising accounts receivable. By the end of the first quarter, accounts receivable reached 1.41 billion yuan, a 19.19% increase year-over-year, and nearly 400 million yuan higher than at the start of the year. According to a third-party financial analysis tool, the value of accounts receivable is equivalent to approximately 74% of the company’s latest annual net profit. When revenue from information services is not collected promptly, the quality of profit is naturally diminished. A gaming company with a net profit margin of nearly 40% should not see cash flow growth lagging behind profit growth. This is a signal that requires careful consideration from investors.
Marketing-driven growth versus stagnant R&D investment
Kingnet Network Co.,Ltd.’s performance driver is essentially marketing. In the first quarter of 2026, the company’s selling expenses skyrocketed to 966 million yuan, a 110.43% increase year-over-year. The selling expense ratio jumped to over 43%, meaning that for every 100 yuan in revenue, more than 43 yuan was spent on user acquisition and promotion. Total expenses for the three major categories (selling, general, and administrative) accounted for 45.47% of revenue, a significant increase of 26.55 percentage points year-over-year. The popular game “Blazing Awakening” generated about 1 billion yuan in revenue in the first quarter, entering the top 10 of WeChat mini-game charts. However, this success was built on exponentially higher marketing spending.
The problem with the user acquisition model is that growth is tightly linked to spending. When spending stops, revenue declines, and profit margins are continuously eroded by rising traffic costs. In the first quarter, the company’s gross margin was 80.75%, a decline of 2.82 percentage points year-over-year. Net profit margin also fell, indicating that the pressure from expenses is becoming visible. On the other side of the cost structure is the company’s meager R&D investment. In the first quarter of 2026, R&D expenses were only 107 million yuan, a 5.87% increase year-over-year, accounting for less than 5% of revenue. This is less than one-ninth of the selling expenses for the same period. Over a longer timeline, the full-year 2025 R&D expenses were 595 million yuan, a slight decrease of 0.55% year-over-year, while selling expenses were 1.676 billion yuan, nearly three times the R&D investment. For a gaming company that claims to be built on R&D, publishing, investment, and IP, the resource allocation heavily skewed toward marketing makes slow product iteration almost inevitable.
Industry analysts have pointed out that Kingnet Network Co.,Ltd. has been plagued by slow product iteration due to insufficient R&D investment, and internal management shortcomings have also hindered development. The thin product pipeline exacerbates this issue. The company’s highly anticipated upcoming products are limited to a few titles like “Three Kingdoms: Hearts Return” and “The Grave Robbers’ Chronicles: Departure,” with delivery timelines that have repeatedly fallen short of market expectations. Older products rely on user acquisition for survival, while new products are slow to take over, leaving a gap in the pipeline. The gaming industry’s content competition has entered a stage of high-quality development. Rivals like miHoYo and NetEase invest several times more in R&D than Kingnet Network Co.,Ltd., making the path of growth through user acquisition increasingly narrow as the benefits of traffic dividends diminish. When doubling selling expenses only yields a 5.75% increase in recurring net profit, the return on investment for this business model is already flashing a warning sign.
Over-reliance on the Legend IP and a looming 7.66 billion yuan arbitration
The deepest structural weakness for Kingnet Network Co.,Ltd. is its excessive dependence on the Legend IP. In February 2026, the company signed a settlement agreement with Legend IP Co., Ltd., paying nearly 200 million yuan to resolve long-standing disputes. Its subsidiary, Xianqu Interactive Entertainment, also obtained a license for the Legend IP. While the settlement cleared legal hurdles, it also led the company to bet even more heavily on the Legend ecosystem. The 996 Legend Box, which integrates game distribution, community, live streaming, cloud gaming, and digital trading, contributed 1.223 billion yuan in revenue in 2025, accounting for nearly a quarter of total revenue. Combined with revenue from various Legend-based games, the company’s income structure is increasingly dominated by the Legend IP.
Putting all eggs in one basket, especially one that is over two decades old, is risky. Gamma Data estimates the Legend IP market size at 35.55 billion yuan in 2025. While the market acknowledges its residual value, the unavoidable issue is that the growth dividend is nearing its peak. Analysts tracking the gaming industry believe that Kingnet Network Co.,Ltd. faces both opportunities and challenges in 2026. The Legend IP dividend remains, but once it fades, the company’s performance will inevitably decline. Its overseas business is too small, and non-Legend products contribute little. Despite years of talk about diversification, the changes visible in the financial statements are minimal.
Another major factor weighing on the stock’s valuation is the unresolved arbitration claim. The claim, stemming from the 2017 acquisition of Zhejiang Jiuling Network, has surged from an initial 171 million yuan to 7.662 billion yuan. As of April 2026, the Korean Commercial Arbitration Board has not yet issued a final ruling. To put this in perspective, the company’s full-year net profit for 2025 was 1.904 billion yuan, meaning the claim is equivalent to four years of total profit. Although Kingnet Network Co.,Ltd. claims the other party is acting in bad faith and has actively responded to the lawsuit, while also setting aside asset impairment provisions, an unfavorable ruling or a high settlement would have a devastating impact on net profit. Additionally, the company’s former actual controller, Wang Yue, was once detained for alleged insider trading and stock price manipulation, leaving a scar on corporate governance that has cost investors dearly. While the current management has led the company out of turmoil, the valuation discount has never been fully repaired. The market’s pricing reflects a clear-eyed assessment of these layered risks.
Final thoughts
A first-quarter report showing 64% revenue growth would typically be a cause for celebration for any gaming company. Yet, Kingnet Network Co.,Ltd. has been met with continued low valuation and market skepticism. The reason is clear: the profit growth driven by one-time settlement gains cannot mask the weakness in recurring net profit growth; the doubling of user acquisition spending cannot hide the stagnation in R&D; the Legend IP ecosystem story cannot conceal the fragility of single-point dependence; and the looming 7.662 billion yuan arbitration claim casts a shadow of uncertainty over any growth narrative. Kingnet Network Co.,Ltd. needs to prove to the market that it can achieve quality growth through products and R&D, not just through one-time gains and aggressive ad spending. Until this question is answered, no matter how impressive the high-growth numbers appear, it will be difficult to change the capital market’s cautious valuation.
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