19 Dec 2019
CMB International Securities | Equity Research | Sector Update
China Game (A-share)
Consolidation & Segmentation OUTPERFORM (Maintain)
We initiated coverage on China Game (A share) sector, with top picks of Perfect China Internet Sector World (“PW”) and Sanqi Interactive (“Sanqi”). As China game industry has stepped into mature stage, we expect top players to get stronger, and more Sophie Huang opportunities will derive from overseas expansion, selective productions and e- (852) 3900 0889 Sports tailwinds. [email protected]
Stepping into mature stage. China game market has stepped into a mature stage (with 11% YoY growth in 1H19), despite moderate recovery in 2019 for Perfect World: 12-mth Price game approvals relaunch. Mobile games, accounting for 65% of total game Performance market, are still on growth track. Game players saw 5.1% YoY growth in 1H19, (RMB) and we view players close to saturation given already-high penetration of 45 002624 CH SHSZ300 (rebased) 61.8%. Looking ahead, 5G, Cloud Game, female gamers and short-video 40 channel marketing could be further drivers. 35 30 The bigger, the stronger. We expect top players to get stronger, with 25 20 advantages of IP resources, channel marketing, data, and self-development 15 ability. As game market growth slows down and Top 2 leaders continue to 10 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 gain shares, we think it is important for players to explore other segmentations or new opportunities, including overseas market, female games, mini games Source: Bloomberg and e-Sports tailwinds. Sanqi: 12-mth Price Performance Eyes on overseas expansion and quality enhancement. After resumption (RMB)
of game licenses approvals, we expect tightening regulations to continue, and 28 002555 CH SHSZ300 (rebased) game players to focus more on selective IPs and healthy & high-quality 26 24 productions. Facing tightening regulation and stiff competition in domestic 22 20 market, major players have put more efforts on overseas expansion and borne 18 initial fruits. China game companies performed well in emerging markets (e.g. 16 14 SEA), with M&A strategy and RPG & SLG as key categories. We believe 12 leaders are still positioned well in global expansion, supported by richer 10 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 experience, strategic M&A and broader network channels. Source: Bloomberg Initiate with BUY. We initiated coverage of Perfect World (002624 CH) and Sanqi (002555 CH), with TPs of RMB49 and RMB30, representing 26.7x and 26x FY20E P/E. We expect Sanqi to continuously strengthen its position in Chuanqi-themed types development, and deliver ongoing pipeline with category diversification and effective marketing. We expect Perfect World to leverage it valuable IPs to boost mobile momentum, and entertainment segment might see recovery in FY20E.
Valuation Table Company Ticker Rating TP Mkt.Cap Currency Price P/E EV/EBITDA (USD mn) FY19E FY20E FY21E FY19E FY20E FY21E Game Tencent 700 HK BUY 420.0 453,672 HKD 378 33.7 28.0 23.1 24.5 20.1 16.8 NetEase NTES US NR NA 38,985 USD 305 19.3 18.8 17.1 14.2 12.8 11.7 Kingsoft 3888 HK NR NA 3,447 HKD 19 NA 71.7 40.7 141.7 28.6 17.6 Perfect World 002624 CH BUY 48.9 7,406 CNY 41 24.9 21.4 18.7 20.2 17.8 16.0 Sanqi Interactive 002555 CH BUY 30.0 7,553 CNY 26 25.4 21.9 19.4 19.6 17.1 14.7 Giant Interactive 002558 CH NR NA 5,177 CNY 18 32.3 27.3 25.6 NA NA NA Average 27.1 23.5 20.8 19.6 17.0 14.8 Source: Company data, Bloomberg
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 1 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 19 Dec 2019
Table of contents
Investment Thesis ...... 3 Focus charts ...... 4 Industry Overview ...... 5 China Game: red ocean with TOP2 dominators ...... 5 Trend 1: Tightening regulations to enhance game quality ...... 7 Trend 2: Go overseas ...... 8 Trend 3: eSports tailwind ...... 12 Trend 4: Newsfeed and Short video as new entrants into publishing market ..12
Sanqi Interactive (002555 CH) ...... 13 Investment Summary ...... 14 Leveraging chuanqi-themed MMPRPGs to strengthen position ...... 14 Category diversification to deliver ongoing pipeline...... 15 Stepping-up overseas expansion to tap into broader market ...... 17 Financial Analysis ...... 19 Revenue Breakdown ...... 19 Income Statement ...... 20 Balance Sheet ...... 21 Cash Flow and Working Capital ...... 22 Valuation ...... 23 Financial Summary ...... 25
Perfect World (002624 CH) ...... 26 Investment Summary ...... 27 Widely-anticipated IP reserve to deliver ongoing pipeline ...... 27 Rich game portfolio with great monetization potential ...... 29 Entertainment: solid pipeline with high-quality products ...... 31 Financial Analysis ...... 33 Revenue Breakdown ...... 33 Income Statement ...... 34 Balance Sheet ...... 35 Cash Flow and Working Capital ...... 36 Valuation ...... 37 Financial Summary ...... 39
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 2
19 Dec 2019
Investment Thesis
Stepping into mature stage. China game market has stepped into a mature stage (with 11% YoY growth in 1H19), despite moderate recovery in 2019 for game approvals relaunch. Mobile games, accounting for 65% of total game market, are still on growth track. Game players saw 5.1% YoY growth in 1H19, and we view players close to saturation given already-high penetration of 61.8%. Looking ahead, 5G, Cloud games, female gamers and short-video channel marketing could be further drivers.
The bigger, the stronger. We expect top players to get stronger, with advantages of IP resources, channel marketing, data, and self-development ability. As game market growth slows down and Top 2 leaders continue to gain shares, we think it is important for players to explore other segmentations or new opportunities, including overseas market, female games, mini games and e-Sports tailwinds.
Eyes on overseas expansion and quality enhancement. After resumption of game licenses approvals, we expect tightening regulations to continue, and game players to focus more on selective IPs and healthy & high-quality productions. Facing tightening regulation and stiff competition in domestic market, major players have put more efforts on overseas expansion and have borne initial fruits. China game companies performed well in emerging markets (e.g. SEA), with M&A strategy and RPG & SLG as key categories. We believe leaders are still positioned well in global expansion, supported by richer experience, strategic M&A and broader network channels.
Initiate with BUY. We initiated coverage of Perfect World (002624 CH) and Sanqi (002555 CH), with TPs of RMB49 and RMB30, representing 26.7x and 26x FY20E P/E. We expect Sanqi to continuously strengthen its position in Chuanqi-themed types development, and deliver ongoing pipeline with category diversification and effective marketing. We expect Perfect World to leverage it valuable IPs to boost mobile momentum, and entertainment segment might see recovery in FY20E.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 3
19 Dec 2019
Focus charts
Figure 1: China games in mature stage Figure 2: Mobile games still on growth track
250 (RMB bn) 80% 160 (RMB bn) 350%
70% 140 300% 200 60% 120 250%
150 50% 100 200% 40% 80 150% 100 30% 60 100% 20% 40 50 10% 20 50%
0 0% 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19 Market size YoY growth Market size YoY growth Source: CNG, CMBIS Source: CNG, CMBIS
Figure 3: Mobile games with higher revenue mix Figure 4: Market share in China in 2018
70% 65% 63% Sanqi Giant Network 4% 1% 60% 57% Kingsoft Perfect World 1% 50% 3% 50%
37% NetEase 40% 24%
30% 24% Tencent 20% 67% 14%
10% 5%
0% 2012 2013 2014 2015 2016 2017 2018 1H19
Source: CNG, CMBIS Source: CNG, CMBIS
Figure 5: China self-developed game revenue in Figure 6: 16% of global mobile game revenue came overseas market grew 20% YoY in 1H19 from China games in 1H19 18% 6 (RMB bn) 140% 16% 5 120% 14% 100% 4 12%
80% 10% 3 60% 8% 16%
2 6% 40% 10% 4% 1 20% 2% 0 0% 1H15 1H16 1H17 1H18 1H19 0% Market size YoY Growth 1H17 1H19 Source: GPC, IDC, CMBIS Source: App Annie, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 4
19 Dec 2019
Industry Overview China Game: red ocean with Top 2 dominators Mature market with continuous consolidation China game market has stepped into a mature stage, despite moderate recovery in 2019 for game approvals relaunch. China game market size reached RMB116.3bn in 1H19, with 10.8% YoY growth (vs. 5.3% in 2018), according to CNG data. Mobile games, accounting for 65% of total game market, are still on growth track, while PC games and Web games on inevitable downward trajectory.
Figure 7: China games at mature stage Figure 8: China games breakdown in 1H19
250 (RMB bn) 80% Others 70% 2% Web games 200 60% 5%
50% 150 PC games 28% 40%
100 30% Mobile games 65% 20% 50 10%
0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19 Market size YoY growth Source: CNG, CMBIS Source: CNG, CMBIS
Players closer to saturation, while ARPU as further growth driver. Game players saw 5.1% YoY growth in 1H19, and we view players close to saturation given already-high penetration of 61.8%. Looking ahead, female gamers and short-video channel marketing could be further user drivers. Noted that female gamers mix grew up to 46.7% in 1H19, mainly on light & interactive games (e.g. Traveling frog <旅行青蛙>, Mr Love: Queen’s choice <恋与制作人>). With slower user growth, ARPU could be next-stage growth driver for games.
Figure 9: Game players to slow down Figure 10: Game player’s breakdown in 1H19
700 (mn) 80%
600 70%
60% 500 50% 400 Female 40% Male 47% 300 53% 30% 200 20%
100 10%
0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19 Users YoY growth
Source: CNG, CMBIS Source: CNG, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 5
19 Dec 2019
Mobile games still on growth trajectory With users shifting into mobile side, PC games and Web games stepped into declining stage, while mobile games still delivered 19% YoY growth in 1H19. Mobile games’ acceleration was mainly attributable to steady key names (e.g. HoK) and newly-launched top titles (e.g. Peacekeeper Elite <和平精英>, Perfect World). We expect mobile games to continue benefit from games approval relaunch, given low base in 2018.
Figure 11: Mobile games still on growth track Figure 12: Mobile games with higher revenue mix
160 (RMB bn) 350% 70% 65% 63%
140 300% 60% 57%
120 50% 250% 50% 100 200% 40% 37% 80 150% 30% 60 24% 100% 20% 40 14% 50% 20 10% 5%
0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1H19 0% 2012 2013 2014 2015 2016 2017 2018 1H19 Market size YoY growth Source: CNG, CMBIS Source: CNG, CMBIS
The bigger, the stronger We expect top players to get stronger, with advantages of IP resources, channel marketing, data, and self-development ability. Smaller players might seek incremental growth from niche verticals, emerging initiatives or unique player groups. Top 2 players (Tencent & NetEase) have occupied 84% market share in 2018, and tend to gain shares based on recent grossing rank.
Figure 13: Market share in China, 2018 Figure 14: Mobile games with higher revenue mix
Sanqi Giant Network 4% 1% Kingsoft Giant NetworkOthers Perfect World 1% 2% 8% 3% Perfect World 3% Kingsoft 1% NetEase Sanqi 6% 24% Tencent 50%
Tencent NetEase 67% 30%
Source: CNG, CMBIS Source: CNG, CMBIS
Female games to gain tractions We still see user upside from female players, as penetration rate of female player lagged behind that of male players in China. In USA market, online players and use frequency of female players have already surpassed that of male players, and Match 3, Family/ Farm Sim/ Casual Puzzle were top 3 popular games types for female games, according to Quantic Foundry. Meanwhile, innovative female games, like Traveling frog <旅行青蛙>, Mr Love: Queen’s choice <恋与制作人>, gained tractions recently. We believe female games will be a large addressable market, backed by multi-channel promotions and innovative products.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 6
19 Dec 2019
Figure 15: Female game players still see ample room User Group (by age) Penetration rate 18-35（Male） 47.2% 36-45（Male） 13.5% 18-35（Female） 38.7% 36-45（Female） 30.0% > 46 6.7% Source: CNG, CMBIS Note: Data updated till Jun 2019
As game market growth slows down and Top 2 leaders continue to gain shares, we think it is important for players to explore other segmentations or new opportunities, including overseas market, female games, mini games and e-Sports tailwinds. Meanwhile, we expect tightening regulations to lead developers to enhance its game quality and content control, and selective hot IPs to see stronger demand.
Trend 1: Tightening regulations to enhance game quality Game approvals to normalize. In Mar 2018, game approval suspended for organization restructure, and then relaunched in Dec 2018, with 80 games license approved. After relaunch of game approvals, approval process returns to normal, with regular frequency but more specific content limitation and selective game approvals. Looking ahead, we expect tightening regulations to continue, and lead game developers to develop and operation high-quality selective productions/ IPs. We see high visibility for game industry growth to accelerate in 2019, for normalized approval process after low base in 2018.
…but no. of games approved declined. After the resumption of game licenses approvals, we noticed that no. of approved titles per batch decreased, compared to 2016/2017. In 2017, no. of approvals per quarter ranged from 50 to 170, while that number declined to < 50 after approval resumption. It would take time to digest the backlog, given the slowdown of approvals (not frequency), but we think the market has well anticipated.
Figure 16: no. of games approved declined after resumption
1200
1000
800
600
400
200
0 2017-01 2017-03 2017-05 2017-07 2017-09 2017-11 2018-01 2018-03 2019-01 2019-03 2019-05 2019-07 2019-09 2019-11 Source: SAPPRFT, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 7
19 Dec 2019
Board & card games to restrict for gambling features. In terms of game types, there are limited content control to release, expect for board & card games. Board & card games accounted for over 50% of game approvals before the resumption. However, we noticed that very few board & card games got approvals in recent batch, for its gambling features. On the opposite, SLG games became the major category of approvals. We expect this content limitation to affect more on boutiques (especially with focus on casual games), but to pose negligible impact on leaders for their few productions on board & card games.
Tightening regulations to enhance game quality. Game approval resumption could be positive catalyst for industry growth acceleration in 2019E. Given tightening regulations on content and no. of approvals, we expect game player to focus more on selective IPs and healthy & high-quality productions. Given stricter self-inspection and closer communication with regulators for leaders, we expect industry concentration in domestic market to continue, and incremental opportunities left for overseas expansion, female-focused segment and e-Sports tailwinds.
Trend 2: Go overseas Chinese players to gain shares in overseas market Facing tightening regulation and stiff competition in domestic market, major players have put more efforts on overseas expansion and borne initial fruits. According to App Annie, 16% of global mobile game revenue came from China games in 1H19 (vs. 10% in 1H17). China self-developed game revenue in overseas market grew 20% YoY in 1H19, higher than domestic market growth of 8.6%, according to GPC & IDC. Backed by richer experience in localization and communication with local players, China game players are expected to continue gain share and explore larger market with more creative content.
Figure 17: China self-developed game revenue in Figure 18: 16% of global mobile game revenue came overseas market grew 20% YoY in 1H19 from China games in 1H19 18% 6 (RMB bn) 140% 16% 5 120% 14% 100% 4 12%
80% 10% 3 60% 8% 16%
2 6% 40% 10% 4% 1 20% 2% 0 0% 1H15 1H16 1H17 1H18 1H19 0% Market size YoY Growth 1H17 1H19 Source: GPC, IDC, CMBIS Source: App Annie, CMBIS
Leading position in emerging market, while still early stage in exploring mature markets China gaming companies performed well in emerging markets (e.g. SEA), mainly on better understanding of user preference, limited competition and heavier marketing efforts. According to App Annie, China game players pioneered in India, Russia and Indonesia market, with revenue contribution of 36%/38%/43% in 1H19. However, some developed markets (e.g. USA and Japan) were still dominated by local players, for its mature landscape and high TAC.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 8
19 Dec 2019
Figure 19: Geographic distribution of publishers Figure 20: Geographic distribution of publishers with Top 250 mobile games in 1H19 (in developed with Top 250 mobile games in 1H19 (in emerging market) market)
Local game publisher Still lagged behind Fierce competition with Chinese game publisher in leading position Amercian game publishers Amercian game publishers in leading position
4% 2%
43%
41% 28%
43% 36% 38% 21% 23% 20% 11% 16% 14% Japan Korea USA UK Germany Brazil India Russia Indonesia Others USA Korea Japan China Others USA Korea Japan China Source: App Annie, CMBIS Source: App Annie, CMBIS
RPG and SLG stand out As the largest category in global market, SLG games’ share began to shrink (47% in 1H19 from 58% in 1H17), for fierce competition and saturation in some developed markets (e.g. USA, UK, Brazil). South Korea might be the most promising area for SLG expansion, as SLG user expenditure in South Korea grew 38% YoY in 2018.
Figure 21: Chinese mobile game breakdown in 2017, Figure 22: Chinese mobile game breakdown in 1H19, based on App Annie Top 1000 games (by user based on App Annie Top 1000 games (by user expenditure) expenditure)
Simulation Others Others Simulation 3% 3% 6% Action Adventure4% 10% 7%
Action 12% SLG 47% RPG SLG 26% 58%
RPG 24%
Source: App Annie, CMBIS Source: App Annie, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 9
19 Dec 2019
Leaders positioned well in overseas expansion. Since 2018, game leaders have begun to put heavy efforts on overseas expansion. In 1H19, Tencent and NetEase operated 37 and 31 overseas games, respectively, while other Top 10 players with 10 games on average. We believe leaders are still positioned well in global expansion, supported by richer experience, strategic M&A and broader network channels.
Figure 23: Overseas games operated from top game players in 1H19 Company Self-development License Total Tencent 腾讯 25 12 37 NetEase 网易 31 0 31 Sanqi Interactive 三七互娱 3 4 7 Perfect world 完美世界 5 1 6 Century Huatong Group 世纪华通 8 0 8 YOOZOO Interactive 游族网络 18 5 23 Kunlun Tech 昆仑万维 7 2 9 ChangYou 搜狐畅游 2 0 2 Elex Technology 智明星通 16 2 18 Xindong 心动网络 5 14 19 Source: iResearch, CMBIS Note: Data updated till Jun 2019
Shooting games gained tractions. According to App Annie, Tencent’s
M&A as key strategy. To speed up overseas expansion, China game companies typically seek for M&A to explore new markets or acquires high-quality IPs. For example, Tencent initiated over 38 overseas M&As of game targets in the past 10 years, including Epic Games (48% of shareholdings), CJ games (28%), Supercell (84%), Bluehole (10%). Perfect World preferred game studios, such as Torchlight and Neverwinter. Looking ahead, we expect overseas M&A to accelerate for stronger demand from domestic players.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 10
19 Dec 2019
Figure 24: M&As of Tencent in 2008-2019 Year Company Country Shareholding Segment 2008-2011 GH Hope Island Korea - PC Eyedentity Game Korea - PC Redduck Korea - PC Topping Korea - PC Nextplay Korea - PC Reloaded Korea - PC Studio Hon Korea - PC Outspark USA - Game publishing 2012 Level UP Singapore 49% Game publishing Epic Game USA 48% PC Zam USA - Games Forum Kamcord USA - Game Tech 2013 Activision Blizzard USA 6% PC Plain Vanilla Iceland - Mobile Hammer & Chisel USA - Mobile 2014 4:33 creative lab Korea - Mobile Dots USA - Mobile Aiming Japan 17% PC+Mobile CJ Games Korea 28% Mobile TapZen USA - Mobile PATI Games Korea 20% Mobile 2015 Artillery USA - PC Miniclip Switzerland - Web+Mobile Riot Games USA 100% PC Glu Mobile USA 15% Mobile Pocket Gems USA 38% Mobile 2016 Paradox Sweden 5% PC Supercell Finland 84% Mobile 2017 Frontier Development UK 9% PC+Mobile Milky Tea UK - PC+Mobile 2018 Blue Hole Korea 10% Console+PC Kakao Games Korea - Mobile Ubisoft Entertainment SA France 5% Console+PC Dream11 India - Mobile Grinding Gear Games New Zealand 80% PC 2019 Fatshark Sweden 36% Console+PC Sharkmob Sweden 100% Console+PC Antstream Arcade UK - Cloud Game Sumo Group UK - PC+Mobile Source: Cited from public news, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 11
19 Dec 2019
Trend 3: eSports tailwind With the wide popularity of HoK and PUBG, we expect China game industry to continue benefit from eSports. In 1H19, eSports games revenue reached RMB5.1bn, with 22.8% YoY growth, while mobile eSports accounted for 62% of total revenue. MOBA and shooting games are key game categories for eSports themes. Meanwhile, game industry would see more synergies from China game livestreaming market.
Figure 25: eSports market size in China Figure 26: eSports market breakdown (by revenue)
600 (RMB bn) 50% 100% 45% 90% 500 40% 80% 35% 70% 400 30% 60% 300 25% 50% 20% 40% 200 15% 30% 10% 20% 100 5% 10% 0 0% 0% 1H16 1H17 1H18 1H19 1H17 1H18 1H19 Market size YoY Mobile PC Source: CNG, CMBIS Source: CNG, CMBIS
Trend 4: Newsfeed and Short video as new entrants into publishing market Backed by huge user base and big data analytics, China new internet giant ByteDance has entered game sector. We believe ByteDance would leverage its channel advantages to gain shares in game publishing, especially for light games, while game development remained to be seen. According to Sensor tower, Dytedance has ranked Top 7 among publishers worldwide for Aug 2019 by downloads.
Figure 27: Top publishers worldwide for Aug 2019 by downloads
Source: SensorTower, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 12
19 Dec 2019
CMB International Securities | Equity Research | Company Initiation
Sanqi Interactive (002555 CH)
From MMORPGs to More BUY (Initiation)
Target Price RMB30.0 Up/Downside +14.7% Sanqi Interactive (“Sanqi”) exceled itself with chuanqi-themed games and Current Price RMB26.2 effective marketing. We keep positive on Sanqi’s healthy topline growth, backed by its solid game pipeline, category diversification and overseas expansion. We forecast Sanqi to deliver 29%/40% revenue/earnings CAGR during FY18-21E. Initiate with BUY with DCF-based TP RMB30. China Internet Sector
Sophie Huang A leading MMORPG player with chuanqi-themed types and effective (852) 3900 0889 marketing. As a leading game developer and operator with chuanqi-themed [email protected] MMORPGs, Sanqi successfully transformed from web games to mobile games operator, with high quality hot titles. Backed by its reputable R&D team and highly effective marketing, we forecast Sanqi to deliver 29%/40% Stock Data revenue/earnings CAGR during FY18-21E, thanks to its strong pipeline, Mkt Cap (RMB mn) 52,806 category diversification and overseas expansion. Avg 3 mths t/o (RMB mn) 525.5 52w High/Low (RMB) 25/9.0 Category diversification to deliver ongoing pipeline. Backed by its Total Issued Shares (mn) 2,112 successful record of chuanqi-themed MMORPGs, Sanqi will continue Source: Bloomberg
strengthen its position in chuanqi-themed types development, in our view. Shareholding Structure Meanwhile, Sanqi also expanded its game category into diversified types, Li Weiwei 19.1% including SLG, ARPG, casual games, etc, backed by self-development and IP Zeng Kaitian 17.5% Wu Weihong 5.3% investment. We expect its ongoing category expansion to help it gain shares Source: Bloomberg and tap into younger generations, especially supported by recent hot titles of The Soul Land (斗罗大陆), Yi Dao Chuan Shi (一刀传世) and Jing Ling Sheng Share Performance Dian (精 灵 盛典). Further catalyst will come from its rich game reserve, Absolute Relative 1-mth 33.7% 30.0% including Fantasy of Tomorrow, Glory Adventure, etc. 3-mth 38.9% 37.9% 6-mth 101.5% 84.7% Stepping-up overseas expansion to tap into broader market. Apart from Source: Bloomberg strengthening its leading position in domestic market, Sanqi steps up its overseas expansion path by leveraging its advantage in traffic operation and 12-mth Price Performance precise marketing. According to App Annie, Sanqi ranked Top 6 in China (RMB) 28 002555 CH SHSZ300 (rebased) mobile game publishers in 2Q19. With initial fruits in SEA market, we expect 26 Sanqi to proactively explore other promising regions, like Japan, Korea, 24 22 Europe and USA. 20 18 Initiate with BUY. We set our DCF-based TP at RMB30 (implying 26x P/E in 16 14 FY20E), slightly higher than industry average, for its strong pipeline and high- 12 10 effective marketing. Key risks: regulation uncertainty, grossing decline of hot Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 titles, weak performance of newly-launched games. Source: Bloomberg
Earnings Summary
(YE 31 Dec) FY17A FY18A FY19E FY20E FY21E Revenue (RMB mn) 6,189 7,633 12,340 14,324 16,514 YoY growth (%) 17.9 23.3 61.7 16.1 15.3 Net income (RMB mn) 1,621 1,009 2,098 2,415 2,777 EPS (RMB) 0.76 0.47 0.99 1.14 1.31 YoY growth (%) NA -37.8 108.0 15.1 15.0 P/E (x) 32.8 52.7 25.3 22.0 19.1 P/S (x) 8.6 7.0 4.3 3.7 3.2 Yield (%) 0.4 0.8 1.7 1.9 2.2 ROE (%) 22.2 16.5 27.0 26.0 25.3 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 13 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 19 Dec 2019
Investment Summary Leveraging chuanqi-themed MMPRPGs to strengthen position Proven successful record in chuanqi-themed MMORPGs Backed by its successful record of chuanqi-themed MMORPGs (e.g. Chuanqi Baye (传奇 霸业)), Sanqi will continue strengthen its position in chuanqi-themed types development. Sanqi was famous for its Jiguang Studio (极光网络工作室), which developed eight hot titles of chuanqi-theme in five years (e.g. Archangel Sword (大天使之剑), Yidaochuanshi (一刀 传世), Chuanqi Baye (传奇霸业)). We see high visibility for Sanqi to step up launching high quality hot titles, backed by its reputable R&D team and highly effective marketing.
Figure 28: Top titles of chuanqi-theme (传奇系列) Figure 29: Sanqi’s gaming business
Source: Company, CMBIS Source: Company, CMBIS
Figure 30: Performance of key titles Launch Time Title Performance 2014.06 大天使之剑 Archangel Sword Grossing ~RMB320mn in 60 days 2014.12 传奇霸业 Chuanqi Baye Grossing ~RMB300mn in 80 days 2016.07 永恒纪元 Eternal Crusade Total grossing ~RMB4bn 2017.09 大天使之剑H5 Archangel Sword H5 Grossing ~RMB100mn in 24 days 2018.07 血盟荣耀 Glory of the Blood Alliance Monthly Grossing ~RMB30mn 2019.02 一刀传世 Yi Dao Chuan Shi Grossing Rank Top 5 Source: Company, App Annie, CMBIS
Multifaceted publishing network and effective marketing Sanqi structures an extensive game publishing network in a bid to reach broader player base. Its multifaceted distribution network consists of application stores, third-party open platforms and social network platforms (e.g. Tencent, iQiyi, Youku). Moreover, Sanqi exceled itself with strong data analytics, to select high-ROI production, enhance monetization mechanism, and achieve user targeting in cost-effective marketing strategy.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 14
19 Dec 2019
Figure 31: Top 10 mobile games with ads expenditure in 3Q19 Rank Title Key publishing network 1 斗罗大陆 Soul Land Baidu Feeds, Ali UC, Huge amount engine, Tencent Ads 2 复古传奇 Retro legend Huge amount engine, Ali UC, Tencent Ads, Baidu Feeds 3 精灵盛典 Fairy Ceremony Huge amount engine, Baidu Feeds, Doyu, Ali UC 4 公益传奇 Charity Legend Ali UC, Youku 5 天王传奇 Uranus Legend Douyu, Baidu Feeds, NetEase, Ali UC 6 黎明：奇迹MU Dawn: Miracle MU Baidu Feeds, Ali UC, Huge amount engine 7 至尊之刃 Extreme Blade Huge amount engine, Baidu Feeds, Baidu Baiqingteng, Qilin Magician 8 大话西游 Journey to the West Huge amount engine, Tencent Ads, NetEase, Weibo 9 至尊蓝月 Extreme Blue Moon Huge amount engine, Baidu Feeds, Ali UC, Tencent Ads 10 全民漂移3D National Drift 3D Huge amount engine, Tencent Ads, Unity Ads, Kuaishou Source: App Growing, CMBIS
Exploring deeper collaboration with short video to capture younger generation In order to capture younger generation and enhance promotion efficiency, Sanqi has also collaborated with short video platforms (e.g. Douyin, Bilibili) to publish and promote games since 2018. For instance, Eternal Crusade (永恒纪元) achieved eye-catching performance, supported by Douyin’s operation. Yi Dao Chuan Shi (一刀传世) ranked high in grossing, thanks to its effective promotions in Douyin, Weibo and Bilibili.
Category diversification to deliver ongoing pipeline Expanding IPs to widen its game genres By investing in excellent IP content platforms and IP production enterprises, Sanqi seeks to gain access to quality IPs and strong relationship with IP owners and content providers. Besides, Sanqi is still exploring more opportunities in eSports. We expect Sanqi to proceed with investment in IP fields to realize strategic synergies and build IP-oriented game ecosystem.
Figure 32: Part of Sanqi’s game reserve No. Game English Name 1 明日幻想（暂定名） Fantasy of Tomorrow 2 云上城之歌（暂定名） Song of the Cloud City 3 超能球球（暂定名） Chao Neng Qiu Qiu 4 光明冒险（暂定名） Glory Adventure 5 代号DG Code DG 6 街区英雄（暂定名） Street Hero 7 代号NB Code NB 8 代号YZD Code YZD 9 代号S Code S 10 暗黑后裔 Dark Ascendant 11 江山与美人 Country and Beauty 12 代号SF Code SF 13 代号TARO Code TARO 14 代号MK4 Code MK4 15 斗罗大陆3D Soul Land 3D Source: Company, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 15
19 Dec 2019
Jing Ling Sheng Dian (精灵盛典) to gain tractions Its three top titles of The Soul Land (斗罗大陆), Yi Dao Chuan Shi (一刀传世), Jing Ling Sheng Dian (精灵盛典), which were launched in 2019, still performed well in 3Q19. The Soul Land (斗罗大陆) and Yi Dao Chuan Shi (一刀传世) ranked Top 40 in iOS grossing games, while Jing Ling Sheng Dian (精灵盛典) still ranked Top 10. Jing Ling Sheng Dian (精灵盛典) gained tractions, with its unique points system (积分系统) and higher paying ratio.
Figure 33: The Soul Land (斗罗大陆) Figure 34: Grossing rank of The Soul Land
Source: Company, CMBIS Source: App Annie, CMBIS
Figure 35: Yi Dao Chuan Shi (一刀传世) Figure 36: Grossing rank of Yi Dao Chuan Shi
Source: Company, CMBIS Source: App Annie, CMBIS
From MMORPGs to SLG, RPG, and more. Unlike most listed peers who are highly dependent on several flagships, Sanqi excelled itself with diversified and strong portfolio and pipeline to deliver stable performance. Apart from MMORPGs games, Sanqi expanded its game category into diversified types, including SLG, ARPG, casual games, etc. For instance, its RPG game - The Soul Land H5 once hit Top 10 grossing rank, with monthly grossing over RMB100mn, after launched in 1Q19. We expect its ongoing category expansion to help it gain shares and tap into younger generations.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 16
19 Dec 2019
Expecting game revenue to soar at 29% CAGR in FY18-21E With eye-catching performance of hot titles launched in 2019, we forecast its game sector to grow 70%/16%/15% YoY in FY19/20/21E. We think FY19E performance has well acknowledged by the market, and further catalysts will derive from FY20E pipeline (e.g. self-developed games NB, YZD; licensed games MK4, DIG, etc.).
Figure 37: Game revenue estimates Figure 38: Game revenue mix change
18000 (RMB mn) 80% 100%
16000 70% 90% 14000 80% 60% 70% 12000 50% 60% 10000 40% 50% 8000 40% 30% 6000 30% 20% 4000 20% 2000 10% 10%
0 0% 0% FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E Game re venue YoY Others Mobile game Web game Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates
Stepping-up overseas expansion to tap into broader market Apart from strengthening its leading position in domestic market, Sanqi steps up its overseas expansion path by leveraging its advantage in traffic operation and precise marketing. According to App Annie, Sanqi ranked Top 6 in China mobile game publishers in 2Q19.
Initial fruits from SEA market, while exploring Japan, South Korea, US and other markets As one of the overseas expansion pioneer, Sanqi has accumulated rich experience in globalization since 2012. Sanqi exceled itself with multiple advantages, including: 1) powerful payment risk management; 2) deep relationship and successful record to lock promising games agents; 3) strong global products reserve, including Western Magic SLG game Code MH(代号 MH) and ARPG game An Hei Hou Yi (暗黑后裔); 4) strong traffic operation to precise targeting groups.
Sanqi achieved initial success in SEA market, backed by eye-catching performance of Eternal Crusade (永恒纪元)、Feng Xian (封仙). For instance, Eternal Crusade (永恒纪元) ranked Top 1 in Grossing rank in HMT (港澳台), SG, Malaysia, Indonesia, Thailand, South Korea, and etc. After that, Sanqi also proactively explored other promising regions, like Japan and South Korea.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 17
19 Dec 2019
Figure 39: Sanqi’s performance in overseas market Title Area Performance HK, Macao, Taiwan Top 1 Grossing Singapore Top 1 Grossing Malaysia Top 1 Grossing Vietnam Top 1 Grossing 永恒纪元 Eternal Crusade Philippines Top 1 Grossing Indonesia Top 2 Grossing Turkey Top 2 Grossing Thailand Top 3 Grossing Korea Top 3 Grossing 镇魔曲 Town magic Taiwan Top 3 Grossing Singapore Top 2 Grossing 封仙 Feng Xian Malaysia Top 2 Grossing 诛仙 Jade Dynasty Thailand Top 4 Grossing Source: Company, App Annie, CMBIS
Expanding international footprint backed by robust localization We believe Sanqi’s extensive global experience and strong localization capabilities can help it to structurally and artistically modify its game offerings through local language scripts and other in-game features specifically redesigned to meet the differentiated gameplay needs and preferences of users from diverse geographical markets. For example, Eternal Crusade (永恒纪元) designed local clothes and mounts feature in its games published in Vietnam and Thailand.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 18
19 Dec 2019
Financial Analysis Revenue Breakdown We forecast Sanqi’ revenue will grow at 62%/16%/15% YoY in FY19/20/21E, in which mobile game business devotes most of total revenue. We expect revenue from games to ramp up to RMB12.3bn in FY19E with a CAGR of 29% in FY18-21E. The robust growth is mainly driven by strong performance of three hot titles launched in 2019. Further catalysts will derive from FY20E pipeline (e.g. self-developed games NB, YZD; licensed games MK4, DIG, etc.).
Figure 40: Revenue growth estimates Figure 41: FY19E revenue breakdown 18,000 70% (RMB mn) 16,000 60% Others 0% Web game 14,000 11% 50% 12,000
10,000 40%
8,000 30% 6,000 20% 4,000 10% Mobile game 2,000 89% 0 0% FY16 FY17 FY18 FY19E FY20E FY21E Others Mobile game Web game YoY growth Source: Company data, CMBIS estimates Source: CMBIS estimates
Figure 42: Revenue breakdown estimates Figure 43: Revenue growth estimates
100% 120%
90% 100% 80% 80% 70% 60% 60% 50% 40%
40% 20% 30% 0% FY17 FY18 FY19E FY20E FY21E 20% -20% 10% -40% 0% FY16 FY17 FY18 FY19E FY20E FY21E Web game Mobile game Revenue Others Mobile game Web game Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 19
19 Dec 2019
Income Statement We expect better margin outlook, and forecast its adj. net profit to grow at 40% CAGR in FY18-21E, mainly driven by 29% revenue CAGR and improving operating margin (19% in FY20E, vs. 10% in FY18).
We expect gross margin to pick up in FY19E, for higher revenue mix from mobile game (with higher GPM). In terms of operating margin, we expect its S&M expense ratio to pick up from FY19E for heavier promotion efforts on new game, while R&D, G&A expense ratio to decline for operating leverage. Overall, we expect its adj. net margin up to 17% in FY19/20/21E.
As a result, we forecast its adj. net profit to reach RMB2,098mn in FY19E, with adj. net margin up to 17% in FY19E.
Figure 44: Income statement RMB mn, Dec-YE FY16 FY17 FY18 FY19E FY20E FY21E Revenue 5,248 6,189 7,633 12,340 14,324 16,514 Cost of sales (1,941) (1,948) (1,811) (1,896) (2,305) (2,787) Gross profit 3,307 4,241 5,821 10,444 12,019 13,728 Sales and marketing expenses (1,608) (1,908) (3,347) (7,256) (8,251) (9,413) Research and development expenses (311) (436) (538) (617) (702) (793) Administrative expenses (204) (340) (246) (290) (358) (438) Other income (19) (38) (919) 74 36 63 Operating profit 1,165 1,518 771 2,355 2,744 3,147 Non-operating income 164 403 464 64 30 30 Non-operating expenses 10 4 15 10 8 5 Pre-tax profit 1,319 1,917 1,219 2,409 2,766 3,172 Income tax expense (102) (80) (68) (241) (290) (349) Profit for the year 1,217 1,836 1,151 2,168 2,476 2,823 Non-controlling interests 147 216 143 71 61 46 Net profit attributable to equity shareholders 1,070 1,621 1,009 2,098 2,415 2,777
Margin Analysis Gross margin 63% 69% 76% 85% 84% 83% Operating margin 22% 25% 10% 19% 19% 19% Net margin 20% 26% 13% 17% 17% 17%
Growth Analysis Revenue NA 18% 23% 62% 16% 15% Gross profit NA 28% 37% 79% 15% 14% Operating profit NA 30% -49% 205% 17% 15% Net profit NA 51% -38% 108% 15% 15% Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 20
19 Dec 2019
Balance Sheet
Healthy balance sheet with net cash position in FY19/20/21E According to our estimates of profit before taxation and change in working capital, Sanqi has strong operating cash inflow in supporting CAPEX in the next three years. Therefore, we believe Sanqi can stay in net cash position in FY19/20/21E. We expect Sanqi to hold RMB2.3bn/RMB3.6bn cash and cash equivalent as of 31 Dec of 2019E and 2020E.
Figure 45: Balance Sheet RMB mn, Dec-YE FY16 FY17 FY18 FY19E FY20E FY21E Non-current assets 3,936 5,198 4,214 4,411 4,568 4,702 Fixed asset 303 343 36 63 78 88 LT investment 787 377 556 734 882 1,010 Intangible assets 2,840 4,466 3,594 3,587 3,581 3,576 Others 6 12 27 27 27 27
Current assets 2,451 3,962 4,182 5,702 7,333 9,256 Cash 819 1,581 1,516 2,331 3,598 5,990 Prepayment 292 284 194 203 247 298 Account receivable 1,033 1,328 1,299 1,994 2,315 1,793 Others 306 770 1,174 1,174 1,174 1,174
Current liabilities 1,624 1,518 1,992 2,086 2,397 2,767 Short-term debt 373 372 369 339 309 279 Customer advances 60 85 95 153 178 205 Accounts payable 718 742 1,082 1,133 1,377 1,665 1-year loan 0 28 30 30 30 30 Others 474 291 417 432 504 589
Non-current liabilities 33 355 290 255 226 196 Borrowings 0 311 281 252 222 192 Others 33 44 9 4 4 4
MI 205 270 141 122 92 48 Total equity 4,729 7,287 6,114 7,772 9,278 10,994 Shareholders' equity 4,524 7,017 5,973 7,650 9,186 10,945 Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 21
19 Dec 2019
Cash Flow and Working Capital
Solid pipeline to ensure strong operating cash flow Leveraging its strong pipeline and margin improvement, we expect PW to maintain its strong operating cash inflow trend and record RMB1,590mn / RMB2,494mn of operating cash inflow in FY19/20E, respectively.
Figure 46: Cash flow and working capital analysis RMB mn, Dec-YE FY16 FY17 FY18 FY19E FY20E FY21E Net income 1,070 1,621 1,009 2,098 2,415 2,777 D&A 174 160 118 81 83 84 Change in WC (204) (467) 638 (617) (40) 898 Others 12 519 190 29 36 (25) Operating CF 1,052 1,832 1,954 1,590 2,494 3,733
CAPEX (209) (1,019) (324) (100) (92) (89) Others (1,308) (349) 269 (98) (98) (98) Investing CF (1,518) (1,368) (55) (198) (190) (187)
Equity raised 316 496 647 - - - Change of Debts 338 341 (58) (60) (60) (60) Others (486) (527) (2,558) (521) (982) (1,094) Financing CF 169 310 (1,969) (581) (1,042) (1,153)
Net change in cash Cash (beg of yr) 1,106 819 1,581 1,516 2,331 3,598 FX 10 (13) 5 5 5 0 Cash (end of yr) 819 1,581 1,516 2,331 3,598 5,990 Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 22
19 Dec 2019
Valuation Initiate with BUY We use DCF valuation as our primary method since it is suitable to apply DCF valuation to emerging companies with healthy cash flows in the long run. Assuming a WACC of 14.1% and a terminal growth rate of 3%, our estimated TP is RMB30, representing 26x FY20E P/E, slightly higher than industry average of 23.5x FY20E P/E.
Figure 47: DCF valuation DCF Valuation (RMB mn) 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E EBIT 2,744 3,147 3,824 4,605 5,498 6,512 7,652 8,925 10,336 11,888 Tax (290) (349) (424) (511) (610) (722) (848) (990) (1,146) (1,318) D&A 83 84 88 92 97 102 107 112 118 123 Change in working capital (40) 898 1,005 1,106 1,216 1,338 1,472 1,619 1,781 1,959 CAPEX (92) (89) (90) (92) (94) (96) (98) (100) (102) (104) FCF 2,404 3,691 4,402 5,200 6,108 7,134 8,284 9,567 10,987 12,548 PV 2,108 2,837 2,967 3,072 3,163 3,239 3,298 3,339 3,361 34,699 Terminal Value 116,816
Assumptions WACC 14.1% Tax rate -12.0% Risk free rate 3.53% Cost of debt 6.0% Beta 1.20 Market risk return 11.4% Cost of equity 14.1% Debt/Assets 0.0% Long term growth 3.0% Debt 0 WACC ~ 12% 13% 14% 15% 16% Equity Value 1.5% 35.2 31.4 28.0 25.5 23.3 PV 62,083 2.0% 36.2 32.2 28.6 26.0 23.6 Terminal minus: Net debt (RMB mn) (1,581) 2.5% 37.4 33.0 29.3 26.5 24.1 growth minus: Minority interest (RMB mn) 0 € 1.00 3.0% 38.6 33.9 30.0 27.1 24.5 rate Equity Value (RMB mn) 63,663 3.5% 40.0 35.0 30.7 27.7 25.0 Shares(mn) 2,125 4.0% 41.6 36.1 31.6 28.4 25.5 TP (RMB) 30.0 4.5% 43.3 37.4 32.5 29.1 26.1 Source: Company data, Bloomberg, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 23
19 Dec 2019
Peers comparison We selected six games comps (Tencent, NetEase, Kingsoft, Perfect World, Sanqi, Giant) as peers comparison. Average FY20E P/E of China games are 23.5x.
Our DCF-based TP implies 26x FY20E P/E, which is slightly higher than industry average of 23.5x. However, we think our implied multiple is not demanding, since 1) most comps are with limited game pipeline, and highly reliable on single game performance; 2) Sanqi is expected to see solid game growth, backed by highly effective marketing; and 3) Sanqi’s FY20E P/E at 26x is in line with industry average of A shares.
Figure 48: Peers valuation Company Ticker Mkt.Cap Currency Price P/E P/S EV/EBITDA FY19-21 (USD mn) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E EPS CAGR Leaders Tencent 700 HK 453,672 HKD 378 33.7 28.0 23.1 8.5 6.8 5.6 24.5 20.1 16.8 21% Alibaba BABA US 555,243 USD 207 Baidu BIDU US 42,685 USD 123 22.6 18.0 13.9 2.8 2.5 2.3 18.6 11.8 10.2 28% JD JD US 50,580 USD 35 35.0 25.4 19.2 0.6 0.5 0.5 22.6 15.7 12.2 35% Meituan 3690 HK 78,109 HKD 103 338.7 79.2 36.8 5.7 4.3 3.4 119.8 51.4 26.7 203% Pinduoduo PDD US 44,960 USD 39 NA 544.7 52.1 10.3 6.2 4.5 NA NA 774.0 NA NetEase NTES US 38,985 USD 305 19.3 18.8 17.1 4.2 4.0 3.6 14.2 12.8 11.7 8% Average 27.8 22.8 18.5 5.7 4.3 3.5 37.1 21.7 123.7 53% Ecommerce Alibaba BABA US 555,243 USD 207 JD JD US 50,580 USD 35 35.0 25.4 19.2 0.6 0.5 0.5 22.6 15.7 12.2 35% Pinduoduo PDD US 44,960 USD 39 NA 544.7 52.1 10.3 6.2 4.5 NA NA 774.0 NA Vipshop VIPS US 9,266 USD 14 14.8 11.9 10.9 0.7 0.7 0.6 10.5 8.3 7.6 16% Babytree 1761 HK 388 HKD 2 NA NA 232.3 5.5 4.5 3.5 NA NA 22.9 NA Average 26.1 20.4 25.4 4.9 3.6 2.8 18.8 14.1 166.3 24% OTA Ctrip TCOM US 20,059 USD 34 25.5 21.2 17.1 3.9 3.5 3.0 24.6 19.4 15.4 22% Tongcheng-elong 780 HK 3,446 HKD 13 17.1 13.6 10.9 3.3 2.7 2.2 10.4 7.7 6.1 24% Tuniu TOUR US 287 USD 2 NA 22.1 11.9 0.9 0.9 0.8 NA NA NA NA Average 21.3 19.0 13.3 2.7 2.3 2.0 17.5 13.5 10.8 3% Game Tencent 700 HK 453,672 HKD 378 33.7 28.0 23.1 8.5 6.8 5.6 24.5 20.1 16.8 21% NetEase NTES US 38,985 USD 305 19.3 18.8 17.1 4.2 4.0 3.6 14.2 12.8 11.7 7% Kingsoft 3888 HK 3,447 HKD 19 NA 71.7 40.7 3.1 2.3 1.8 141.7 28.6 17.6 NA Perfect World 002624 CH 7,406 CNY 41 24.9 21.4 18.7 6.1 5.2 4.6 20.2 17.8 16.0 15% Sanqi Interactive 002555 CH 7,553 CNY 26 25.4 21.9 19.4 4.3 3.7 3.3 19.6 17.1 14.7 14% Giant Interactive 002558 CH 5,177 CNY 18 32.3 27.3 25.6 8.6 7.7 6.9 NA NA NA 12% Average 27.1 23.5 20.8 5.8 5.0 4.3 19.6 17.0 14.8 17% Live streaming MOMO MOMO US 7,554 USD 36 13.0 10.9 9.5 3.1 2.6 2.3 11.3 7.9 6.7 19% YY YY US 4,525 USD 56 14.0 10.4 7.5 1.2 1.0 0.8 9.7 6.6 3.8 38% Inke 3700 HK 272 HKD 1 4.5 2.4 2.4 NA NA NA NA NA NA 38% Huya HUYA US 3,803 USD 17 38.8 22.9 15.4 3.2 2.3 1.9 39.5 16.3 10.5 65% Average 17.6 11.6 8.7 2.5 2.0 1.7 20.2 10.3 7.0 39% Entertainment Tencent Music TME US 18,788 USD 11.5 29.4 23.9 17.9 5.2 4.1 3.2 24.6 18.7 13.6 28% iQiyi IQ US 14,352 USD 19.7 NA NA NA 3.5 3.0 2.5 27.8 16.3 9.0 -48% China Literature 772 HK 4,333 HKD 33.3 29.6 24.2 20.6 4.4 3.8 3.3 17.3 13.5 11.6 21% Bilibili BILI US 5,857 USD 18.0 NA NA 102.6 6.1 4.2 3.2 NA 252.3 29.9 NA Average 29.5 24.0 47.0 4.8 3.8 3.1 23.3 75.2 16.0 0% Ads Baidu BIDU US 42,685 USD 123.2 22.6 18.0 13.9 2.8 2.5 2.3 18.6 11.8 10.2 30% Weibo WB US 10,113 USD 44.9 16.5 15.8 13.8 5.7 5.3 4.7 14.0 12.9 11.3 10% Sina SINA US 2,590 USD 37.3 13.3 13.3 10.7 1.2 1.1 1.0 5.3 4.9 4.1 14% Mobvista 1860 HK 662 HKD 3.4 15.4 9.8 6.4 1.2 1.0 0.8 15.3 8.0 5.5 46% Duiba 1753 HK 646 HKD 4.6 20.2 8.4 5.9 2.3 1.6 1.2 16.8 5.3 3.6 232% 58.com WUBA US 9,299 USD 62.2 16.3 18.8 17.2 4.2 3.7 3.3 17.2 14.8 12.4 0% Average 17.4 14.0 11.3 2.9 2.5 2.2 14.5 9.6 7.8 33% Total Average 20.8 17.3 16.7 4.0 3.3 2.8 23.2 23.3 41.0 29.6% Source: Bloomberg Note: Data updated by 18 Dec 2019
Key Investment Risks Key investment risks might derive from: 1) Uncertainty in regulations; 2) slower-than- expected launch of new games; and 3) grossing decline of hot titles.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 24
19 Dec 2019
Financial Summary
Income statement Cash flow summary YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E Revenue 6,189 7,633 12,340 14,324 16,514 Net income 1,621 1,009 2,098 2,415 2,777 Film & TV 5,629 7,247 12,340 14,324 16,514 D&A 160 118 81 83 84 Games 560 385 - - - Change in WC (467) 638 (617) (40) 898 COGS (1,948) (1,811) (1,896) (2,305) (2,787) Others 519 190 29 36 (25) Gross profit 4,241 5,821 10,444 12,019 13,728 Operating CF 1,832 1,954 1,590 2,494 3,733
S&M (1,908) (3,347) (7,256) (8,251) (9,413) Capex (1,019) (324) (100) (92) (89) Admin.Exp. (340) (246) (290) (358) (438) Associates - 1 2 3 4 R&D (436) (538) (617) (702) (793) Others (349) 268 (100) (101) (102) Others (38) (919) 74 36 63 Investing CF (1,368) (55) (198) (190) (187) Operating profit 1,518 771 2,355 2,744 3,147 Equity raised 496 647 - - - Non-operating Rev 403 464 64 30 30 Change of Debts 341 (58) (60) (60) (60) Non-operating Exp 4 15 10 8 5 Others (374) 1,310 1,451 2,363 3,606 Pre-tax Income 1,925 1,250 2,429 2,782 3,182 Financing CF 464 1,899 1,391 2,304 3,546
Income Tax (80) (68) (241) (290) (349) Net change in cash 762 (65) 815 1,266 2,393 Less: MI 216 143 71 61 46 Cash (beg of yr) 819 1,581 1,516 2,331 3,598 Net profit 1,621 1,009 2,098 2,415 2,777 FX (13) 5 5 5 - Cash (end of yr) 1,581 1,516 2,331 3,598 5,990
Balance sheet Key ratios YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec FY17A FY18A FY19E FY20E FY21E Non-current assets 5,198 4,214 4,411 4,568 4,702 Sales mix (%) Fixed asset 343 36 63 78 88 Film & TV 90.9 95.0 100.0 100.0 100.0 LT investment 377 556 734 882 1,010 Games 9.1 5.0 0.0 0.0 0.0 Intangible assets 4,466 3,594 3,587 3,581 3,576 Total 100.0 100.0 100.0 100.0 100.0 Others 12 27 27 27 27
Growth rate (%) Current assets 3,962 4,182 5,702 7,333 9,256 Revenue 17.9 23.3 61.7 16.1 15.3 Cash 1,581 1,516 2,331 3,598 5,990 Gross profit 28.2 37.3 79.4 15.1 14.2 Restricted cash 284 194 203 247 298 EBIT 28.6 37.4 79.5 15.1 14.2 Account receivable 940 1,299 1,994 2,315 1,793 Net profit 51.4 (37.8) 108.0 15.1 15.0 Others 1,158 1,174 1,174 1,174 1,174 P&L ratios (%) Current liabilities 1,518 1,992 2,086 2,397 2,767 OPM 24.5 10.1 19.1 19.2 19.1 Short-term debt 372 369 339 309 279 Pre-tax margin 31.1 16.4 19.7 19.4 19.3 Customer advances 85 95 153 178 205 Net margin 22.6 22.4 15.6 16.0 15.8 Accounts Payable 742 1,082 1,133 1,377 1,665 tax rate (1.3) (0.9) (2.0) (2.0) (2.1) 1-year loan 28 30 30 30 30 Others 291 417 432 504 589 Returns (%) ROE 22.2 16.5 27.0 26.0 25.3 Non-current liabilities 355 290 255 226 196 ROA 17.7 12.0 20.7 20.3 19.9 Borrowings 311 281 252 222 192 Others 44 9 4 4 4 Per share EPS (RMB) 0.76 0.47 0.99 1.14 1.31 MI 270 141 122 92 48 DPS (RMB) 0.10 0.20 0.42 0.48 0.55 Total Equity 7,287 6,114 7,772 9,278 10,994 BVPS (RMB) 0.74 0.71 1.10 1.69 2.82 Shareholders' equity 7,017 5,973 7,650 9,186 10,945 Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 25
19 Dec 2019
CMB International Securities | Equity Research | Company Initiation
Perfect World (002624 CH)
Game leader with valuable IPs BUY (Initiation)
Target Price RMB48.9 Up/Downside +19.3% We expect Perfect World (“PW”) to keep its solid game momentum and see Current Price RMB41.0 potential entertainment recovery, backed by valuable IPs, strong development team and high-quality productions. We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E. Initiate with BUY with DCF-based TP RMB49. China Internet Sector
Sophie Huang A leading game & entertainment player with valuable IPs. As a PC game (852) 3900 0889 pioneer, PW successfully transferred its strategic focus on mobile games, and [email protected] developed notable IP-based titles, such as New Jade Dynasty Mobile (新诛仙) and Perfect World Mobile (完美世界手游). We forecast PW to deliver 11%/17% revenue/earnings CAGR during FY18-21E, thanks to its solid game and Stock Data entertainment pipeline. Mkt Cap (RMB mn) 51,514 Avg 3 mths t/o (RMB mn) 421.2 Game: rich game portfolio to maintain strong momentum. Backed by 52w High/Low (RMB) 41/22.6 valuable IPs and strong development team, PW had rich game pipeline in Total Issued Shares (mn) 1,293 2H19E, including New Swordsman Mobile (新笑傲江湖), Nightmare, New Source: Bloomberg
Forsaken World (新神魔大陆), etc. We expect its rich game pipeline will Shareholding Structure continuously boost ongoing growth in 2020E, supported by stepping-up new Perfect World 35.1% games introduction and launch. We forecast its game sector to grow 23%/14% DQ JunYang Ent 11.9% Chi Yufeng 10.2% YoY in FY19/20E, in which PC/ mobile games to deliver 5%/39% YoY growth Source: Bloomberg in FY19E. Share Performance Entertainment: more high-quality productions to come. Film industry in Absolute Relative China faces multiple challenges in 2019, including flat industrial growth and 1-mth 32.1% 28.4% tightening regulations on celebrity, content and pipeline. Given recent film 3-mth 35.3% 34.3% 6-mth 62.3% 48.8% headwinds, we expect PW’s entertainment segment to bear pressure in Source: Bloomberg FY19E, but keep positive on it recovery in FY20E, supported by its strong pipeline with high-quality TV dramas and movies. 12-mth Price Performance (RMB) Initiate with BUY. We initiate BUY with DCF-based TP of RMB49, implying 45 002624 CH SHSZ300 (rebased) 26.7x P/E in FY20E. We think the majority of PW’s solid FY19E financials 40 have been partly priced in, and PW’s positive price drivers and catalysts 35 30 originate from: 1) further performance of new games; and 2) stepping-up 25 contribution from entertainment after regulation headwinds. 20 15 10 Earnings Summary Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 (YE 31 Dec) FY17A FY18A FY19E FY20E FY21E Revenue (RMB mn) 7,930 8,034 8,651 9,945 11,056 Source: Bloomberg YoY growth (%) 28.8 1.3 7.7 15.0 11.2 Net income (RMB mn) 1,505 1,706 2,086 2,410 2,719 EPS (RMB) 1.14 1.30 1.59 1.83 2.07 YoY growth (%) 29.0 13.4 22.3 15.5 12.8 P/E (x) 35.8 31.6 25.8 22.4 19.8 P/S (x) 6.8 6.7 6.2 5.4 4.9 Yield (%) 0.4 0.4 0.5 0.6 0.7 ROE (%) 17.5 20.2 18.7 18.5 17.6 Net gearing (%) Net cash Net cash Net cash Net cash Net cash Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 26 ACCESS KEY TO OUR REPORTS ON BLOOMBERG: CMBR 19 Dec 2019
Investment Summary Widely-anticipated IP reserve to deliver ongoing pipeline Leveraging valuable PC IPs to boost mobile momentum We see high visibility for PW to continue develop high quality and selective hot titles, backed by its valuable PC IP reserve. Since 2013, PW has begun to transfer its strategic focus on mobile games from PC games, and successfully developed notable PC IP-based titles, such as New Jade Dynasty Mobile <新诛仙>, Perfect World Mobile <完美世界手游>， and Return of the Condor Heroes 2 <神雕侠侣 2>. Moreover, most of its hot titles have long lifecycle.
Figure 49: PW’s key titles
Source: Company, CMBIS
Figure 50: PW’s PC game in operation No Title Chinese Title Type Launch Date 1 Jade Dynasty 3 诛仙3 MMORPG 2007 2 PW International 完美国际 MMORPG 2006 3 Swordsman 笑傲江湖 OL MMORPG 2013 4 My Own Swordsman 武林外传 MMORPG 2006 5 Forsaken World 2 神魔大陆 2 MMORPG 2013 6 Fantasy Jade Dynasty 2 梦幻诛仙 2 MMORPG 2009 7 Redcliffe 赤壁 MMORPG 2008 8 Creation chariots 创世战车 FTG 2019 9 The Mummy 神鬼传奇 MMORPG 2009 10 War of the Immortals 神鬼世界 MMORPG 2010 11 Perfect World 完美世界 MMORPG 2005 12 Condor Heroes 神雕侠侣 MMORPG 2012 13 Dance party MAX 热舞派对 MAX Social Casual 2008 14 Pocketpet Journey West 口袋西游 MMORPG 2008 15 CS:GO CS:GO RTS 2012 16 DOTA 2 DOTA 2 MOBA 2013 Source: Company data, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 27
19 Dec 2019
Figure 51: PW’s mobile game in operation No Title Chinese Title Type Grossing Rank Launch Date 1 Jade Dynasty Mobile 诛仙手游 MMORPG 4 2016.09 2 Perfect World Mobile 完美世界手游 MMORPG 1 2019.03 3 My Own Swordsman Mobile 武林外传官方手游 MMORPG 3 2018.05 4 Condor Heroes 2 神雕侠侣2 手游 MMORPG 6 2019.07 5 Reincarnation 轮回诀 RPG 30 2018.04 6 Feng Long Zhan Ji 封龙战纪 MMORPG 63 2019.01 7 The Legend of The Condor Heroes Mobile 射雕英雄传手游 MMORPG 5 2017.06 8 The Legend of The Condor Heroes 3D 射雕英雄传 3D MMORPG 9 2016.03 9 Dream book 梦间集 Simulation 61 2017.07 10 Torchlight 火炬之光 MMORPG 66 2016.12 11 Final Fantasy Awakening 最终幻想 · 觉醒 MMORPG 5 2016.12 12 Heavenly Sword Dragon Slaying Saber 倚天屠龙记 MMORPG 8 2016.05 13 Legend of Condor Hero Mobile 神雕侠侣手游 MMORPG 11 2015.01 14 The Flame's Daughter 烈火如歌 MMORPG 26 2018.04 15 My Origin 我的起源 Sandbox 48 2019.11 16 Yun Meng Si Shi Ge 云梦四时歌 RPG 6 2019.05 Source: Company data, App Annie, CMBIS
Flagship of
Figure 52: iOS grossing rank of
Source: App Annie, CMBIS
Not only MMORPG, but more… We expect PW’s game category expansion to enrich its game portfolio and deliver ongoing contribution. PW had rich experience in MMORPG games development. Apart from MMORPG, PW continuously explores diversified game types, such as SLG, CCG, female- oriented games. For instance,
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 28
19 Dec 2019
Stepping up game development to maximize IP monetization We believe PW’s solid R&D team and stepping-up investment play key role in well-known game development. In 2018, PW had a R&D team with 2,823 developers, accounting for 66% of total employees. Moreover, its R&D/rev ratio were around 25% in the past three years, higher than industrial average (18%).
Figure 53: PW’s R&D team Figure 54: R&D expenses
2900 70% 1.6 （RMB bn） 35%
1.4 2800 60% 30% 1.2 50% 25% 2700 1 40% 20% 2600 0.8 30% 15% 0.6 2500 20% 10% 0.4 2400 10% 0.2 5%
2300 0% 0 0% 2016 2017 2018 2016 2017 2018 1H18 1H19 No. of R&D employees As of total employees R&D expenses % of total revenue Source: Company data, CMBIS Source: Company data, CMBIS
Rich game portfolio with great monetization potential Backed by valuable IPs and strong development team, PW had rich game pipeline in 2H19E, including New Swordsman Mobile (新笑傲江湖), Nightmare, etc. PC games also see strong titles in pipeline, including New Fantasy Zhuxian (新诛仙世界), Perfect World (完美世界主机版). etc. We expect its rich game pipeline will continue boost ongoing growth in 2020E, supported by stepping-up new games introduction and launch (e.g. New Forsaken World (新神魔大陆), Meng Jian Ji Tian'e Zuo(梦间集天鹅座), New Fantasy Zhuxian(梦幻新诛仙)).
Mobile games to maintain strong momentum We are bullish on PW’s mobile game revenue growth in FY19E. We forecast its mobile games to grow 39% YoY in FY19E, given its strong pipeline and newly-launched hot titles. In particular, we expect Perfect World Mobile ( 完美世界手游) and Zhuxian(诛仙) to contribute revenue significantly (accounting for 48% of total mobile game revenue in FY19E), due to 1) their high quality graphic effects, 2) innovative features based on its profound understanding of players, and 3) reputable IP and cooperation with Tencent.
Figure 55: PW’s game revenue estimate Figure 56: PW’s mobile game revenue estimate
9000 (RMB mn) 30% 6000 (RMB mn) 50%
8000 25% 5000 40% 7000 20% 30% 6000 4000 15% 5000 20% 10% 3000 4000 10% 5% 3000 2000 0% 0% 2000 1000 -10% 1000 -5%
0 -10% 0 -20% FY16 FY17 FY18 FY19E FY20E FY21E FY16 FY17 FY18 FY19E FY20E FY21E Game re venue YoY Mobile game YoY Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 29
19 Dec 2019
In 4Q19, ReEvolve (我的起源), a sandbox game distributed by Tencent, performed well after launch, with iOS grossing rank at ~30 in game category. New Swordsman Mobile (新 笑傲江湖) will also be launched in Dec 2019. We expect these new games to contribute 6%/17% of total revenue in FY19/20E.
Figure 57: ReEvolve (我的起源) grossing rank Figure 58: ReEvolve (我的起源)
Source: App Annie, CMBIS Source: Company, CMBIS
PC games outperformed despite industrial decline Although PC games step into declining stage, PW’s PC games still deliver solid growth in FY19E. We forecast its PC games to grow 5% YoY in FY19E, largely higher than industrial average. Among the new PC games to be launched, we are optimistic on the performance of New Fantasy Zhuxian (新诛仙世界), Perfect World (完美世界主机版).
Figure 59: PC game revenue forecast Figure 60: Perfect World PC version
3000 (RMB mn) 12% 10% 2500 8%
2000 6%
4% 1500 2%
1000 0%
-2% 500 -4%
0 -6% FY16 FY17 FY18 FY19E FY20E FY21E PC game YoY Source: Company data, CMBIS estimate Source: Company, CMBIS
Expecting games to grow at 23% YoY in FY19E. In total, we forecast its game sector to grow 23%/15% YoY in FY19/20E. We think FY19E performance has well acknowledged by the market, and further catalysts will derive from FY20E pipeline.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 30
19 Dec 2019
Entertainment: solid pipeline with high quality products Film industry in China faces multiple challenges in 2019, including flat industrial growth and tightening regulations on celebrity, content, pipeline. Given recent film headwinds, we expect PW’s entertainment to bear pressure in FY19E, but keep positive on its recovery in FY20E, supported by its strong pipeline with high quality TV dramas and movies.
Notable track record backed by solid team and high quality content By investing in excellent production team and enterprises, PW has built over 10 selective production teams with diversified production style. It will introduce enriched productions catering to all kinds of audience demand. In the past years, PW produced multiple proven successful dramas, like Ashes of Live (香蜜沉沉烬如霜), The Flame's Daughter (烈火如歌) and recent Youth Strive (青春斗). We believe PW could leverage its M&A resources, solid team and content production, to continue deliver well-performed drama series.
Figure 61: The Flame's Daughter (烈火如歌) Figure 62: Playback Rank in Apr 1 2019 14,000
12,000
10,000
8,000
6,000
4,000
2,000
0 青春斗 都挺好 推手 只为遇见你 春暖花又开
Source: Company, CMBIS Source: VLinkage, CMBIS
More high quality productions to come With regulations on film and TV relaxed in 4Q19, we see high visibility for PW to see stepping-up production release and revenue recognized. Looking ahead, there are about 20 TV dramas in pipeline. We believe the upcoming productions will be further catalysts, including New Horizon (壮志高飞), Bu Hun Nv Wang (不婚女王), etc.
Expecting entertainment to recover in FY20E We expect entertainment segment to decline 23% YoY in FY19E, in which solid TV drama to partly offset movies decline. However, we expect its entertainment revenue to rebound in FY20E (forecasting 17% YoY growth), with strong pipeline and upcoming productions release. Meanwhile, we see high visibility for its entertainment segment GPM to recover, for decreasing cost of TV production and celebrity salaries.
Figure 63: Entertainment revenue forecast
3000 (RMB mn) 70% 60% 2500 50% 2000 40% 30% 1500 20% 10% 1000 0% 500 -10% -20% 0 -30% FY16 FY17 FY18 FY19E FY20E FY21E Film & TV YoY Source: Company data, CMBIS estimate
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 31
19 Dec 2019
Figure 64: Solid entertainment pipeline No. Title English Name 1 不婚女王 Bu Hun Nv Wang 2 壮志高飞 Zhuang Zhi Gao Fei 3 半生缘 Eighteen Springs 4 最美的乡村 The most beautiful countryside 5 暴风眼 Storm Eye 6 怪你过分美丽 You're too beautiful 7 冰糖炖雪梨 Bing Tang Dun Xue Li 8 月上重火 Heavy fire 9 全世界最好的你 Best of you 10 江山故人 Jiang Shan Gu Ren 11 新一年又一年 Year After Year 12 大海港 Seaport 19 我在天堂等你 Waiting for you in heaven 14 蓝盔特战队 Blue helmet 15 燃烧 Burning 16 高大霞的火红年代 Gao Daxia's Flaming Age 17 霍元甲 Huo Yuanjia Source: Company, CMBIS
Figure 65: Zhuang Zhi Gao Fei (壮志高飞) Figure 66: Bu Hun Nv Wang (不婚女王)
Source: Company, CMBIS Source: Company, CMBIS
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 32
19 Dec 2019
Financial Analysis Revenue Breakdown We forecast PW’s revenue will grow at 8%/15%/11% YoY in FY19/20/21E, in which game business still devotes most of total revenue. We expect game revenue up to RMB6,636mn in FY19E with a CAGR of 16% in FY18-21E, accounting for 77% of total revenue. The robust growth is mainly driven by solid pipeline of both games and entertainment.
Figure 67: Revenue growth estimates Figure 68: FY19E revenue breakdown 12,000 35% (RMB mn)
10,000 30% Others 0% Film & TV 25% 23% 8,000 20% 6,000 15% 4,000 10% Games 2,000 5% 77%
0 0% FY16 FY17 FY18 FY19E FY20E FY21E Others Games Film & TV YoY growth Source: Company data, CMBIS estimates Source: CMBIS estimates
Figure 69: Revenue breakdown estimates Figure 70: Revenue growth estimates
100% 70% 90% 60% 80% 50% 70% 40% 60% 30% 50% 20% 40% 10% 0% 30% FY17 FY18 FY19E FY20E FY21E 20% -10% -20% 10% -30% 0% FY16 FY17 FY18 FY19E FY20E FY21E Film & TV Games Others Revenue Others Games Film & TV Source: Company data, CMBIS estimates Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 33
19 Dec 2019
Income Statement We expect better margin outlook, and forecast its adj. net profit to grow at 17% CAGR in FY18-21E, mainly driven by 11% revenue CAGR and improving operating margin (28% in FY20E, vs. 24% in FY18).
We expect gross margin to pick up in FY19E, for lower revenue mix from entertainment (with lower GPM). In terms of operating margin, we expect opex ratio to rise in FY19E, but decline from FY20E, for operating leverage. Overall, we expect its adj. net margin up to 24%/24%/25% in FY19/20/21E.
As a result, we forecast its net profit to reach RMB2,086mn in FY19E, with net margin up to 24% in FY19E.
Figure 71: Income statement RMB mn, Dec-YE FY16 FY17 FY18 FY19E FY20E FY21E Revenue 6,159 7,930 8,034 8,651 9,945 11,056 Cost of sales (2,404) (3,381) (3,550) (3,114) (3,852) (4,326) Gross profit 3,755 4,549 4,484 5,537 6,094 6,731 Sales and marketing expenses (755) (744) (880) (887) (970) (1,078) Research and development expenses - - (1,413) (1,665) (1,780) (1,924) General and administrative expenses (1,836) (2,073) (704) (737) (788) (903) Other income 37 (143) 406 182 229 307 Operating (loss)/profit 1,201 1,589 1,892 2,431 2,785 3,132 Non-operating income 157 72 31 30 50 50 Non-operating expenses (2) (13) (7) (7) (7) (7) Profit before taxation 1,356 1,649 1,916 2,453 2,828 3,175 Income tax expense (223) (189) (156) (307) (353) (397) Profit for the year 1,133 1,460 1,759 2,147 2,474 2,778 Non-controlling interests 33 45 (53) (61) (65) (59) Net profit attributable to equity shareholders 1,166 1,505 1,706 2,086 2,410 2,719
Margin Analysis Gross margin 61% 57% 56% 64% 61% 61% Operating margin 20% 20% 24% 28% 28% 28% Net margin 19% 19% 21% 24% 24% 25%
Growth Analysis Revenue 29% 1% 8% 15% 11% Gross profit 21% -1% 23% 10% 10% Operating profit 32% 19% 28% 15% 12% Net profit 29% 13% 22% 16% 13% Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 34
19 Dec 2019
Balance Sheet
Healthy balance sheet with net cash position in FY19/20/21E According to our estimates of profit before taxation and change in working capital, PW has strong operating cash inflow in supporting CAPEX in the next three years. Therefore, we believe PW can stay in net cash position in FY19/20/21E. We expect PW to hold RMB7.2bn/RMB9.4bn cash and cash equivalent as of 31 Dec of 2019E and 2020E.
Figure 72: Balance Sheet RMB mn, Dec-YE FY17 FY18 FY19E FY20E FY21E Non-current assets 6,339 5,195 4,233 3,380 2,562 Fixed asset 491 362 300 238 184 LT investment 3,237 3,452 3,622 3,712 3,802 Intangible assets 114 87 94 98 100 Others 2,496 1,294 217 -668 -1,524
Current assets 10,246 10,783 13,519 16,690 19,978 Cash 3,236 4,229 7,165 9,390 11,998 Prepayment 852 790 693 857 962 Account receivable 1,662 1,964 2,115 2,432 2,703 Others 4,497 3,800 3,547 4,011 4,314
Current liabilities 5,215 3,921 3,992 4,330 4,562 Short-term debt 618 1,270 1,270 1,270 1,270 Customer advances 529 409 441 507 563 Accounts Payable 1,803 1,372 1,204 1,489 1,672 1-year loan 1,106 0 200 200 200 Others 1,160 870 877 864 856
Non-current liabilities 2,552 2,725 2,525 2,325 2,125 Borrowings 500 794 594 394 194 Others 2,052 1,932 1,932 1,932 1,932
MI 823 870 925 983 1,036 Total Equity 8,787 9,309 11,213 13,392 15,829 Shareholders' equity 7,964 8,439 10,288 12,409 14,793 Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 35
19 Dec 2019
Cash Flow and Working Capital
Solid pipeline to ensure strong operating cash flow Leveraging its strong pipeline and margin improvement, we expect PW to maintain its strong operating cash inflow trend and record RMB2,244mn / RMB1,803mn of operating cash inflow in FY19/20E, respectively.
Figure 73: Cash flow and working capital analysis RMB mn, Dec-YE FY17 FY18 FY19E FY20E FY21E Net income 1,505 1,706 2,086 2,410 2,719 D&A 280 166 117 103 105 Change in WC (1,074) (1,261) 59 (630) (468) Others 93 (742) (18) (80) (171) Operating CF 804 (130) 2,244 1,803 2,185
Capex (194) (141) 67 (69) (69) Associates - - - - - Others 1,909 3,117 960 922 886 Investing CF 1,715 2,976 1,027 853 817
Equity raised 2 0 - - - Change of Debts (359) (160) - (200) (200) Others (1,095) (1,793) (336) (231) (194) Financing CF (1,451) (1,952) (336) (431) (394)
Net change in cash 1,032 920 2,936 2,226 2,608 Cash (beg of yr) 1,900 2,931 3,852 6,788 9,013 FX (37) 27 - - - Cash (end of yr) 2,931 3,852 6,788 9,013 11,621 Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 36
19 Dec 2019
Valuation Investment Thesis We initiate BUY with DCF-based TP of RMB49, implying 26.7x FY20E P/E. We think the majority of PW’s solid FY19E financials have been partly priced in, and PW’s positive price drivers and catalysts originate from: 1) further performance of new games, and 2) stepping- up contribution from entertainment after regulation headwinds.
Initiate with BUY We use DCF valuation as our primary method since it is suitable to apply DCF valuation to game companies with healthy cash flows in the long run. Assuming a WACC of 13.9% and a terminal growth rate of 3%, our estimated TP is RMB49, representing 26.7x FY20E P/E, slightly higher than industry average of 23.5x FY20E P/E.
Figure 74: DCF valuation DCF Valuation (RMB mn) 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E EBIT 2,785 3,132 3,915 4,845 5,938 7,211 8,679 10,358 12,261 14,402 Tax (353) (397) (496) (614) (752) (914) (1,100) (1,312) (1,554) (1,825) D&A 103 105 110 113 117 120 124 128 131 135 Change in working capital (630) (468) (374) (300) (240) (192) (153) (123) (98) (79) CAPEX (69) (69) (71) (72) (74) (75) (77) (78) (80) (81) FCF 1,836 2,302 3,084 3,973 4,989 6,150 7,473 8,972 10,661 12,553 Terminal Value 118,928
Assumptions WACC 13.9% Tax rate -12.0% Risk free rate 3.53% Cost of debt 6.0% Beta 1.20 Market risk return 11.4% Cost of equity 14.1% Debt/Assets 2.6% Long term growth 3.0% Debt 0 WACC ~ 12% 13% 14% 15% 16% Equity Value 1.5% 56.1 50.0 45.6 40.8 37.3 PV 58,630 2.0% 57.8 51.3 46.6 41.6 37.9 Terminal minus: Net debt (RMB mn) (5,695) 2.5% 59.6 52.7 47.7 42.4 38.6 growth minus: Minority interest (RMB mn) 0 1 3.0% 61.6 54.2 48.9 43.3 39.3 rate Equity Value (RMB mn) 64,325 3.5% 63.8 55.9 50.2 44.3 40.0 Shares(mn) 1,315 4.0% 66.4 57.7 51.7 45.4 40.9 TP (RMB) 49 4.5% 69.2 59.8 53.3 46.6 41.8 Source: Company data, Bloomberg, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 37
19 Dec 2019
Peers comparison We selected six games comps ((Tencent, NetEase, Kingsoft, Perfect World, Sanqi, Giant)) and four entertainment comps (TME, BILI, IQ, China Literature) as peers, to reflect its business model. Average FY20E P/E of China games and entertainment are 23.5x and 24.0x, respectively. Our DCF-based TP implies multiple of 26.7x FY20E P/E, slightly higher than industry average, for its higher earnings growth and strong pipeline. We believe its solid games and entertainment rebound could be further catalysts.
Figure 75: Peers valuation Company Ticker Mkt.Cap Currency Price P/E P/S EV/EBITDA FY19-21 (USD mn) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21E EPS CAGR Leaders Tencent 700 HK 453,672 HKD 378 33.7 28.0 23.1 8.5 6.8 5.6 24.5 20.1 16.8 21% Alibaba BABA US 555,243 USD 207 Baidu BIDU US 42,685 USD 123 22.6 18.0 13.9 2.8 2.5 2.3 18.6 11.8 10.2 28% JD JD US 50,580 USD 35 35.0 25.4 19.2 0.6 0.5 0.5 22.6 15.7 12.2 35% Meituan 3690 HK 78,109 HKD 103 338.7 79.2 36.8 5.7 4.3 3.4 119.8 51.4 26.7 203% Pinduoduo PDD US 44,960 USD 39 NA 544.7 52.1 10.3 6.2 4.5 NA NA 774.0 NA NetEase NTES US 38,985 USD 305 19.3 18.8 17.1 4.2 4.0 3.6 14.2 12.8 11.7 8% Average 27.8 22.8 18.5 5.7 4.3 3.5 37.1 21.7 123.7 53% Ecommerce Alibaba BABA US 555,243 USD 207 JD JD US 50,580 USD 35 35.0 25.4 19.2 0.6 0.5 0.5 22.6 15.7 12.2 35% Pinduoduo PDD US 44,960 USD 39 NA 544.7 52.1 10.3 6.2 4.5 NA NA 774.0 NA Vipshop VIPS US 9,266 USD 14 14.8 11.9 10.9 0.7 0.7 0.6 10.5 8.3 7.6 16% Babytree 1761 HK 388 HKD 2 NA NA 232.3 5.5 4.5 3.5 NA NA 22.9 NA Average 26.1 20.4 25.4 4.9 3.6 2.8 18.8 14.1 166.3 24% OTA Ctrip TCOM US 20,059 USD 34 25.5 21.2 17.1 3.9 3.5 3.0 24.6 19.4 15.4 22% Tongcheng-elong 780 HK 3,446 HKD 13 17.1 13.6 10.9 3.3 2.7 2.2 10.4 7.7 6.1 24% Tuniu TOUR US 287 USD 2 NA 22.1 11.9 0.9 0.9 0.8 NA NA NA NA Average 21.3 19.0 13.3 2.7 2.3 2.0 17.5 13.5 10.8 3% Game Tencent 700 HK 453,672 HKD 378 33.7 28.0 23.1 8.5 6.8 5.6 24.5 20.1 16.8 21% NetEase NTES US 38,985 USD 305 19.3 18.8 17.1 4.2 4.0 3.6 14.2 12.8 11.7 7% Kingsoft 3888 HK 3,447 HKD 19 NA 71.7 40.7 3.1 2.3 1.8 141.7 28.6 17.6 NA Perfect World 002624 CH 7,406 CNY 41 24.9 21.4 18.7 6.1 5.2 4.6 20.2 17.8 16.0 15% Sanqi Interactive 002555 CH 7,553 CNY 26 25.4 21.9 19.4 4.3 3.7 3.3 19.6 17.1 14.7 14% Giant Interactive 002558 CH 5,177 CNY 18 32.3 27.3 25.6 8.6 7.7 6.9 NA NA NA 12% Average 27.1 23.5 20.8 5.8 5.0 4.3 19.6 17.0 14.8 17% Live streaming MOMO MOMO US 7,554 USD 36 13.0 10.9 9.5 3.1 2.6 2.3 11.3 7.9 6.7 19% YY YY US 4,525 USD 56 14.0 10.4 7.5 1.2 1.0 0.8 9.7 6.6 3.8 38% Inke 3700 HK 272 HKD 1 4.5 2.4 2.4 NA NA NA NA NA NA 38% Huya HUYA US 3,803 USD 17 38.8 22.9 15.4 3.2 2.3 1.9 39.5 16.3 10.5 65% Average 17.6 11.6 8.7 2.5 2.0 1.7 20.2 10.3 7.0 39% Entertainment Tencent Music TME US 18,788 USD 11.5 29.4 23.9 17.9 5.2 4.1 3.2 24.6 18.7 13.6 28% iQiyi IQ US 14,352 USD 19.7 NA NA NA 3.5 3.0 2.5 27.8 16.3 9.0 -48% China Literature 772 HK 4,333 HKD 33.3 29.6 24.2 20.6 4.4 3.8 3.3 17.3 13.5 11.6 21% Bilibili BILI US 5,857 USD 18.0 NA NA 102.6 6.1 4.2 3.2 NA 252.3 29.9 NA Average 29.5 24.0 47.0 4.8 3.8 3.1 23.3 75.2 16.0 0% Ads Baidu BIDU US 42,685 USD 123.2 22.6 18.0 13.9 2.8 2.5 2.3 18.6 11.8 10.2 30% Weibo WB US 10,113 USD 44.9 16.5 15.8 13.8 5.7 5.3 4.7 14.0 12.9 11.3 10% Sina SINA US 2,590 USD 37.3 13.3 13.3 10.7 1.2 1.1 1.0 5.3 4.9 4.1 14% Mobvista 1860 HK 662 HKD 3.4 15.4 9.8 6.4 1.2 1.0 0.8 15.3 8.0 5.5 46% Duiba 1753 HK 646 HKD 4.6 20.2 8.4 5.9 2.3 1.6 1.2 16.8 5.3 3.6 232% 58.com WUBA US 9,299 USD 62.2 16.3 18.8 17.2 4.2 3.7 3.3 17.2 14.8 12.4 0% Average 17.4 14.0 11.3 2.9 2.5 2.2 14.5 9.6 7.8 33% Total Average 20.8 17.3 16.7 4.0 3.3 2.8 23.2 23.3 41.0 29.6% Source: Bloomberg Note: Data updated by 18 Dec 2019
Key Investment Risks Key investment risks might derive from: 1) Uncertainty in regulations; 2) slower-than- expected launch of new games; 3) grossing decline of hot titles; and 4) film headwinds.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 38
19 Dec 2019
Financial Summary
Income statement Cash flow summary YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E Revenue 7,930 8,034 8,651 9,945 11,056 Net income 1,505 1,706 2,086 2,410 2,719 Film & TV 2,277 2,611 2,015 2,352 2,582 D&A 280 166 117 103 105 Games 5,622 5,389 6,636 7,594 8,475 Change in WC (1,074) (1,261) 59 (630) (468) Others 31 33 33 33 33 Others 93 (742) (18) (80) (171) COGS (3,381) (3,550) (3,114) (3,852) (4,326) Operating CF 804 (130) 2,244 1,803 2,185 Gross profit 4,549 4,484 5,537 6,094 6,731 Capex (194) (141) 67 (69) (69) S&M (744) (880) (887) (970) (1,078) Associates - - - - - Admin.Exp. (2,073) (704) (737) (788) (903) Others 1,909 3,117 960 922 886 R&D - (1,413) (1,665) (1,780) (1,924) Investing CF 1,715 2,976 1,027 853 817 Others (328) (144) (70) 75 160 Operating profit 1,589 1,892 2,431 2,785 3,132 Equity raised 2 0 - - - Change of Debts (359) (160) - (200) (200) Non-operating Rev 72 31 30 50 50 Others (1,095) (1,793) (336) (231) (194) Non-operating Exp (13) (7) (7) (7) (7) Financing CF (1,451) (1,952) (336) (431) (394)
Pre-tax Income 1,649 1,916 2,453 2,828 3,175 Net change in cash 1,032 920 2,936 2,226 2,608 Income Tax (189) (156) (307) (353) (397) Cash (beg of yr) 1,900 2,931 3,852 6,788 9,013 Less: MI 45 (53) (61) (65) (59) FX (37) 27 - - - Net profit 1,505 1,706 2,086 2,410 2,719 Cash (end of yr) 2,931 3,852 6,788 9,013 11,621
Balance sheet Key ratios YE 31 Dec (RMB mn) FY17A FY18A FY19E FY20E FY21E YE 31 Dec FY17A FY18A FY19E FY20E FY21E Non-current assets 6,339 5,195 4,233 3,380 2,562 Sales mix (%) Fixed asset 491 362 300 238 184 Film & TV 28.7 32.5 23.3 23.6 23.4 LT investment 3,237 3,452 3,622 3,712 3,802 Games 70.9 67.1 76.7 76.4 76.6 Intangible assets 114 87 94 98 100 Others 0.4 0.4 0.4 0.3 0.3 Others 2,496 1,294 217 (668) (1,524) Total 100.0 100.0 100.4 100.3 100.3
Current assets 10,246 10,783 13,519 16,690 19,978 Growth rate (%) Cash 3,236 4,229 7,165 9,390 11,998 Revenue 28.8 1.3 7.7 15.0 11.2 Restricted cash 852 790 693 857 962 Gross profit 21.1 (1.4) 23.5 10.0 10.5 Account receivable 1,662 1,964 2,115 2,432 2,703 EBIT 32.3 19.1 28.5 14.6 12.4 Others 4,497 3,800 3,547 4,011 4,314 Net profit 77.4 22.1 12.6 19.4 13.5
Current liabilities 5,215 3,921 3,992 4,330 4,562 P&L ratios (%) Short-term debt 618 1,270 1,270 1,270 1,270 OPM 20.0 23.6 28.1 28.0 28.3 Customer advances 529 409 441 507 563 Pre-tax margin 20.8 23.8 28.4 28.4 28.7 Accounts Payable 1,803 1,372 1,204 1,489 1,672 Net margin 17.6 21.2 22.2 23.1 23.5
1-year loan 1,106 - 200 200 200 tax rate (2.4) (1.9) (3.5) (3.6) (3.6) Others 1,160 870 877 864 856 Returns (%) Non-current liabilities 2,552 2,725 2,525 2,325 2,125 ROE 17.5 20.2 18.7 18.5 17.6 Borrowings 500 794 594 394 194 ROA 9.1 10.7 11.7 12.0 12.1 Others 2,052 1,932 1,932 1,932 1,932 Per share MI 823 870 925 983 1,036 EPS (RMB) 1.14 1.30 1.59 1.83 2.07 Total Equity 8,787 9,309 11,213 13,392 15,829 DPS (RMB) 0.17 0.18 0.22 0.25 0.29 Shareholders' equity 7,964 8,439 10,288 12,409 14,793 BVPS (RMB) 2.23 2.93 5.16 6.86 8.84 Source: Company data, CMBIS estimates
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 39
19 Dec 2019
Disclosures & Disclaimers Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.
CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS
OUTPERFORM : Industry expected to outperform the relevant broad market benchmark over next 12 months MARKET-PERFORM : Industry expected to perform in-line with the relevant broad market benchmark over next 12 months UNDERPERFORM : Industry expected to underperform the relevant broad market benchmark over next 12 months
CMB International Securities Limited Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong, Tel: (852) 3900 0888 Fax: (852) 3900 0800
CMB International Securities Limited (“CMBIS”) is a wholly owned subsidiary of CMB International Capital Corporation Limited (a wholly owned subsidiary of China Merchants Bank)
Important Disclosures There are risks involved in transacting in any securities. The information contained in this report may not be suitable for the purposes of all investors. CMBIS does not provide individually tailored investment advice. This report has been prepared without regard to the individual investment objectives, financial position or special requirements. Past performance has no indication of future performance, and actual events may differ materially from that which is contained in the report. The value of, and returns from, any investments are uncertain and are not guaranteed and may fluctuate as a result of their dependence on the performance of underlying assets or other variable market factors. CMBIS recommends that investors should independently evaluate particular investments and strategies, and encourages investors to consult with a professional financial advisor in order to make their own investment decisions. This report or any information contained herein, have been prepared by the CMBIS, solely for the purpose of supplying information to the clients of CMBIS or its affiliate(s) to whom it is distributed. This report is not and should not be construed as an offer or solicitation to buy or sell any security or any interest in securities or enter into any transaction. Neither CMBIS nor any of its affiliates, shareholders, agents, consultants, directors, officers or employees shall be liable for any loss, damage or expense whatsoever, whether direct or consequential, incurred in relying on the information contained in this report. Anyone making use of the information contained in this report does so entirely at their own risk. The information and contents contained in this report are based on the analyses and interpretations of information believed to be publicly available and reliable. CMBIS has exerted every effort in its capacity to ensure, but not to guarantee, their accuracy, completeness, timeliness or correctness. CMBIS provides the information, advices and forecasts on an "AS IS" basis. The information and contents are subject to change without notice. CMBIS may issue other publications having information and/ or conclusions different from this report. These publications reflect different assumption, point-of-view and analytical methods when compiling. CMBIS may make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. CMBIS may have a position, make markets or act as principal or engage in transactions in securities of companies referred to in this report for itself and/or on behalf of its clients from time to time. Investors should assume that CMBIS does or seeks to have investment banking or other business relationships with the companies in this report. As a result, recipients should be aware that CMBIS may have a conflict of interest that could affect the objectivity of this report and CMBIS will not assume any responsibility in respect thereof. This report is for the use of intended recipients only and this publication, may not be reproduced, reprinted, sold, redistributed or published in whole or in part for any purpose without prior written consent of CMBIS. Additional information on recommended securities is available upon request.
For recipients of this document in the United Kingdom This report has been provided only to persons (I)falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended from time to time) (“The Order”) or (II) are persons falling within Article 49(2) (a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc.,) of the Order, and may not be provided to any other person without the prior written consent of CMBIS.
For recipients of this document in the United States This report is intended for distribution in the United States to "major US institutional investors", as defined in Rule 15a-6 under the US, Securities Exchange Act of 1934, and may not be furnished to any other person in the United States. Each major US institutional investor that receives a copy of this research report by its acceptance hereof represents and agrees that it shall not distribute or provide this research report to any other person.
For recipients of this document in Singapore This report is distributed in Singapore by CMBI (Singapore) Pte. Limited (CMBISG) (Company Regn. No. 201731928D), an Exempt Financial Adviser as defined in the Financial Advisers Act (Cap. 110) of Singapore and regulated by the Monetary Authority of Singapore. CMBISG may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, as defined in the Securities and Futures Act (Cap. 289) of Singapore, CMBISG accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact CMBISG at +65 6350 4400 for matters arising from, or in connection with the report.
Notes: CMBIS or its affiliate(s) have investment banking relationship with the issuers covered in this report in preceding 12 months.
PLEASE READ THE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES ON LAST PAGE 40