02400.HK: Is TapTap Quietly Rewriting XD Inc.’s Valuation?
TapTap’s margins, monetization engine, evergreen thesis and hidden risk.
The stock market likes simple labels, so XD Inc. (02400.HK) tends to still get classified as a video game company. It’s true! XD reported RMB 5.76 billion in revenue during FY2025, of which approximately RMB 3.80 billion (65.9%) was generated by games and around RMB 1.97 billion (34.1%) was generated by the TapTap platform.
But the picture begins to look very different once you dig below the top line. TapTap has a gross margin of 86.2% versus the games segment’s 67.4% and its growth does not require XD continuously gambling on whether the next game will be another blockbuster. Net of risks explained below, TapTap may already be contributing more after-tax operating profit than games on a normalized basis and is also likely to represent a majority of XD’s enterprise value on a sum-of-the-parts basis. Look past the headline revenue figure and you’ll see a business whose economics are increasingly driven by a high-margin platform selling services to the broader games industry.
TapTap Does Not Sell Downloads
TapTap has been compared to Apple’s App Store, traditional Android app stores, and even Steam but those aren’t great points of comparison from a monetization perspective. Traditional app stores take a cut by sitting directly in the transaction flow. TapTap largely avoided that model. Outside of a relatively small payment processing fee for paid games sold in mainland China, XD allows developers to keep game revenue, instead generating the majority of its platform revenue by selling performance-based advertising, pre-registration, download, activation and user acquisition services to game companies.
In other words, what TapTap actually sells is not software distribution. It sells access to an audience of players who have already shown strong intent to download, engage and spend on games. That distinction is important because it means we can stop thinking about TapTap strictly as a distributor. The value of TapTap is not determined by how many apps it sells, but by whether game companies think users acquired through TapTap drive better returns than users acquired through other advertising channels.
We can see that clearly in the operating results from the past year. Monthly active users in mainland China only grew about 2.1% to 45 million during FY2025, while platform revenue grew 24.7%. Annualized advertising revenue per monthly active user (MAU) increased to approximately RMB 42.5, up roughly 22%. An even more revealing year was FY2023 when MAUs declined 13.5% but platform revenue grew by 32.6%. If TapTap relied on constantly growing its audience to drive revenue growth, those two metrics would have moved much closer together.
Instead, the data suggests TapTap’s commercial engine can extract greater value from a fixed set of users over time through better targeting, higher user intent, greater engagement, and an advertiser willingness to pay more. Advertisers pay TapTap because they think gaming users on TapTap are better than the users they could acquire at comparable prices on other platforms.
That’s why investors should not treat TapTap as a traditional consumer internet platform that needs endless growth just to maintain its position. TapTap is increasingly acting like mature vertical advertising asset: the user growth rate can decelerate because each user is now generating more economic value than ever before.
The Simple Reason Why an 86% Gross Margin Is Sustainable
To some, TapTap’s high gross margin must look unsustainable. If it costs so little to operate TapTap why doesn’t everybody just do it themselves? What keeps competitors out? The answer: network effects.
TapTap’s high gross margin is not a testament to temporary cost discipline. Rather, it is encoded into the underlying economics of the platform. TapTap does not need to buy most of its content because game developers want their games on TapTap. It does not need to pay for much of the guides, reviews, ratings, and discussion because users will voluntarily create that content for free. Finally, TapTap can maintain high margins because it does not have to pay large revenue-sharing fees to game publishers like a traditional distributor would.
Put simply: Users → create content for free, Developers → give TapTap free access to their products, All while Advertisers → pay TapTap for conversions.
The business primarily has to service the cost of servers, bandwidth, moderation, product development and advertising technology. By economic standards, TapTap is monetizing an externality: a huge gaming ecosystem where most of the supply side value is created entirely outside of its own cost structure.
Digging in even deeper, that also creates an incredibly valuable intangible asset on TapTap’s balance sheet that most investors completely overlook: ever-growing library of game guides, historical ratings, version updates, player discussions, and game knowledge. Any individual piece of content (a review here, a gameplay guide there) is probably worthless on its own. However, if you step back and view TapTap as a whole you can start to see how a comprehensive archive of thousands of games can create search traffic, switching costs, user habit, and access to unparalleled interest data.
As users spend more time on TapTap, it learns more about their individual preferences. As more users join and create content, the archive gets richer for the next user who joins. You can view this mechanism as network effects if you’d like. We view it as a powerful, virtuous cycle.
And lastly, TapTap benefits from being cross publisher neutral. Tencent, NetEase, and other large game publishers can and do build loyal communities around their own products. But those communities can only be interested in those publishers’ games. TapTap can host that interest and engagement across rival publishers and game genres. It has the potential to serve as an infrastructure layer between games companies and players instead of just another first-party marketing channel.
Potential is the key word in that previous sentence.
High gross margins aren’t proof that TapTap has attained any sort of network effect or industry infrastructure status just yet.
Risks Are Asymmetrically Loaded to the Advertiser Side
Management disclosed that XD had a single customer that represented 18% of group revenue in FY2025. In pure revenue terms, that equates to more than RMB 1 billion. XD has neither named that customer, disclosed how much of that spending was linked to TapTap specifically, or shared any details about advertiser count, repeat purchasing, retention, concentration risks, or any of the other metrics you would normally use to assess demand side health.
If a majority of that RMB 1 billion was spent through XD’s online marketing services business then yes, one advertiser represents a very large portion of TapTap revenue. That is materially different than how most investors discuss TapTap today and should change how you think about the business’s valuation. A diversified advertiser base means recurring revenue, more pricing power distributed throughout the ecosystem, and longer duration metrics can credibly be applied to the valuation. A stable of large advertisers can still power an excellent business, but that business is less sticky than its peers and should trade at a significantly lower multiple as a result.
This leads us to the biggest unanswered question for TapTap bulls. While we love the user-side economics (deep engagement, rising monetization per user, accelerating revenue despite monthly active user declines), we are not quite there yet on the advertiser side of the business. If most of that RMB 1 billion comes from one or two advertisers then Stop. Using. The. Phrase. “Platform infrastructure.”
Until we know more about how diversified TapTap actually is on the demand side, we view this as the largest risk to the thesis.
Games Performance Needs More Accounting Discipline Than Headline Profit Indicates
XD’s headline FY2025 performance looked good. Net profit attributable to shareholders totaled RMB 1.66 billion, up 86%, and operating cash flow was RMB 1.71 billion. Cash of around RMB 3.69 billion at year-end and negligible borrowings left XD with a pristine balance sheet and strong cash conversion.
The underlying game economics are less clear cut. Monthly active users of online games and monthly paying users of online games both decreased by approximately 20%. Contract liabilities decreased by 22.9%. Contract liabilities principally consist of player payments received that have not yet been fully recognized as revenue because the associated virtual currency or items remain unused. A declining contract-liability balance can signal that previously stored up deferred revenue is being released at a faster rate than it is being replenished by current player spending. In other words, some of today’s revenue may be buoyed by releasing an older pool of revenue.
Game revenue recognized on a net basis also increased to 13.5% of total game revenue, up from 4.3%. This partly reflects XD’s international publishing and agency deals. Revenue recognized net records only XD’s commission or economic share of revenue, rather than the full player payment, while developer and channel fees paid by XD are neither included in revenue nor cost of sales. There’s also a distortion on the tax rate line. XD’s effective tax rate for FY2025 was just around 3.6%. This is almost certainly aided by tax credits and research-and-development expenditures. That may be completely legitimate, but it’s not a conservative rate to apply forward for purposes of calculating normalized earnings. Applying a valuation multiple directly to reported net profit risks treating both an anomalously low tax year and an exceptionally strong point in the product cycle as the new normal.
For that reason the games segment should be dissected game by game instead of being valued as a monolith. Ragnarok M and its subsequent Classic variations are closer to cyclical monetization of a persistent intellectual property franchise. Nostalgia can be monetized multiple times but shouldn’t be treated as multiple launches of perpetual annuities. Go Go Muffin and several other titles seem more like launch-driven products whose revenue naturally peaks early then fades. Torchlight: Infinite and Heartopia are the two games most likely to have staying power.
Torchlight: Infinite exhibits seasonality you’d expect from a live-service title and now benefits from XD’s ownership of the Torchlight IP to limit future royalty leakage while creating potential for sequels and expansions. Heartopia has elements of the social elements, housing, customization mechanics, and simulation that can foster lasting user lifetimes. Both games have qualities you like to see in evergreen franchises, but demonstration of potential is not the same as demonstrated performance. Just because a game has been operated for two or three years does not mean it should be afforded the same valuation posture as a franchise with 10 years of stable cash flow.
The difference is massive. The average mobile game is a project-based asset. Publishers front load on user acquisition costs, revenue peaks upon launch, and profits reverse course as retention drops off and acquisition costs must be repeated or increased to maintain peak output. An evergreen game operates more like a long-duration asset that continually trades on user relationships, recurring seasons, vanity progression, cosmetic purchases, and community ties. A large share of the upside in XD’s games valuation thesis hinges on Torchlight: Infinite and Heartopia eventually meeting that standard.
PC Maker and Developer Services Shouldn’t Be Considered Established Earnings
TapTap is diversifying or looking to diversify across PC distribution, game-making tools, developer services, and geographic expansion. PC is the natural first extension. PC gamers care more about detailed reviews, guides, ratings, social discussion, and cross-platform discovery than mobile gamers tend to. Independent developers, likewise, have stronger incentives to embrace a low- or zero-commission distribution alternative. If TapTap can transplant its existing user and advertising economics into PC gaming it could meaningfully expand its addressable universe without sacrificing core DNA.
TapTap Maker is an even more exciting prospect. Empowering users and small teams to create, publish, and monetize games natively inside TapTap could allow the platform to begin supplying its own games rather than exclusively distributing third-party content. There’s significant commercial and regulatory uncertainty to work through, however. Likewise the current operating proof added by TapTap Maker is minimal.
TapTap’s new businesses certainly have option value, but they shouldn’t be mixed into the multiple applied to XD’s established advertising business. This is important. I think one of the more common mistakes made in platform investments is immediately capitalizing a hypothetical future business as if it possessed the same economic risk profile as the core business. I’d be more comfortable valuing XD’s advertising engine by its current metrics, then separately modeling PC, Maker, developer services, and geographic expansion with probability-weighted outcomes.
The Reported P/E Looks Cheaper Than the Normalized Business Really Is
Because XD’s reported earnings were lifted by a very low effective tax rate, favorable revenue-recognition mix, and outsized contributions from titles at temporarily attractive points in their cycles, the reported price-to-earnings ratio makes shares seem cheaper than normalized earnings would suggest. Separating TapTap, the underlying game portfolio, the optional businesses, and excess cash provides a better framing for discussion.
Based on assumptions outlined in the underlying research, TapTap’s normalized after-tax operating profit is roughly RMB 650 million. This assumes that the platform bears meaningful spending on PC, Maker, artificial intelligence (AI), and developer services, so it is conservative relative to a strict calculation of what the advertising business would contribute on its own. Applying average revenue growth of approximately 12% per year over five years and discounting future cash flows at ~10.5% produces an enterprise value for the mature TapTap advertising asset of roughly RMB 12 billion. Including the expected value of PC, Maker, developer-service, and international expansion options increases enterprise value by a further estimated RMB 1.7 billion.
Valuing the game portfolio title by title according to the stage of each title’s product life cycle and its durability produces an estimated RMB 4.2 billion value in the base case. Cash and other non-operating net assets contribute roughly RMB 3.5 billion. Summing these components produces a base-case equity value of approximately RMB 21.4 billion or HKD 49.4 per diluted share.
Discounting the base case to account for downside risks produces an implied equity value of approximately RMB 19.8 billion, or HKD 45.7 per share. The base case assumes that the worst case outcome for each of TapTap/advertising revenue concentration, the game portfolio, and the success of optional businesses does not occur, but rather that: the largest advertiser remains, TapTap’s monetization grows at a high rate that gradually moderates, the core game portfolio experiences an orderly decline that is manageable within broader corporate overhead, and the various optional businesses ultimately create some value without needing heroic growth assumptions to do so. Once the implied equity value of each possible outcome is weighted by its probability of occurring, estimated equity value falls to roughly RMB 19.8 billion.
At the June 13, 2026 reference price of approximately HKD 50.4 used in the price discovery section of the underlying research, XD was trading near the base-case valuation but about 10% above the probability-weighted estimate of fair value. While the market was not ascribing an extreme premium to the fully realized platform story, it was already trading at a slight premium to expectations for a relatively orderly set of operating outcomes.
Conclusion
XD’s business has undergone a genuine step change in quality. By building TapTap, management has reduced the company’s dependence on the success or failure of any single internally developed title. Excessive dependence on blockbuster titles has been replaced by meaningful exposure to game industry-wide user acquisition spending, concentrated within a single scalable product. In addition to solid cross-platform game development expertise, high gross margin, light capital requirements, and large scale moat built on deep community content contributions are real structural advantages that should help the company earn above-average returns on invested capital going forward.
From a value perspective, XD increasingly resembles a vertical advertising platform with an attached game studio (albeit one with a shallower pool of durable titles than the average game publisher) and a large cash balance rather than a conventional game publisher monetizing intellectual property while also operating a small community app. Those strengths notwithstanding, the remaining gap between current share price and the sum of XD’s parts is a proof gap.
TapTap has not yet proven that it is sufficiently diversified for investors to treat its advertising revenue as infrastructure-like. In similar fashion, Torchlight: Infinite and Heartopia have not yet been proven to have earned fully evergreen status, while PC and Maker offer significant potential but have yet to prove themselves as established profit pools.
While management is working to prove up the value of the company’s ad-serving capabilities, investors buying at or around current levels are doing likewise. The investment conclusion is more nuanced than reported earnings might indicate: XD’s business model is improving and TapTap is meaningfully upgrading the quality of the business, but around the reference valuation used in this research, you are already paying for most of the base case. Remaining upside is tied primarily to outcomes that are positive but not yet fully proven, rather than to any obvious undervaluation of the business already in place.
Disclaimer: This publication is intended for informational, educational, and research purposes only. It should not be construed as investment advice or a recommendation to purchase or sell any security, or as an offer or solicitation of any kind. All financial data and valuation estimates, as well as assumptions underlying various scenarios, are based on information that may be incomplete, subject to errors and omissions, and reflect our judgments at a particular point in time. Actual outcomes may vary significantly from expected results due to factors such as operating performance, customer concentration, product lifecycle, regulation and competition, foreign exchange fluctuations, and general market conditions. Individuals should make their own investment decisions based on their own research and financial situation.