LEYOU TECHNOLOGIES HOLDINGS LIMITED LEYOU TECHNOLOGIES HOLDINGS LIMITED Annual Report 2018 Contents Contents CONTENTS Corporate Information 2 Financial Highlights 3 Chairman’s Statement 4 Management Discussion and Analysis 8 Corporate Governance Report 22 Directors and Senior Management Profile 42 Report of the Directors 46 Environmental, Social and Governance Report 61 Independent Auditors’ Report 77 Audited Consolidated Financial Statements Consolidated Statement of Profit or Loss 84 Consolidated Statement of Profit or Loss and Other Comprehensive Income 85 Consolidated Statement of Financial Position 86 Consolidated Statement of Changes in Equity 88 Consolidated Statement of Cash Flows 90 Notes to the Consolidated Financial Statements 92 Five-Year Financial Summary 200 LEYOU TECHNOLOGIES HOLDINGS LIMITED Annual Report 2018 1 Corporate Information Corporate Information DIRECTORS LEGAL ADVISORS AS TO HONG KONG LAW Executive Directors MinterEllison LLP Mr. Xu Yiran (Chairman and Chief Executive Officer) Level 32, Wu Chung House, 213 Queen’s Road East, Mr. Li Yang (Deputy Chairman) Hong Kong (Appointed on 23 November 2018) Mr. Gu Zhenghao AUDITORS Mr. Cao Bo HLB Hodgson Impey Cheng Limited Certified Public Accountants 31/F, Gloucester Tower, Non-executive Directors The Landmark, 11 Pedder Street, Mr. Eric Todd Central, Hong Kong Mr. Cheng Chi Ming Brian STOCK CODE Mr. Li Zhigang (Resigned on 15 November 2018) 1089 Independent non-executive Directors PRINCIPAL BANKERS Mr. Hu Chung Ming The Hong Kong and Shanghai Banking Mr. Chan Chi Yuen Corporation Limited Bank of Communications Co., Ltd. Mr. Kwan Ngai Kit REGISTERED OFFICE AUDIT COMMITTEE Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands Mr. Hu Chung Ming (Chairman) Mr. Chan Chi Yuen PRINCIPAL PLACE OF BUSINESS IN HONG Mr. Kwan Ngai Kit KONG Suite 3201, Tower Two, Lippo Centre, REMUNERATION COMMITTEE 89 Queensway, Admiralty, Hong Kong Mr. Hu Chung Ming (Chairman) CAYMAN ISLANDS PRINCIPAL SHARE Mr. Chan Chi Yuen REGISTRAR AND TRANSFER OFFICE Mr. Xu Yiran SMP Partners (Cayman) Limited 3rd Floor, Royal Bank House, NOMINATION COMMITTEE 24 Shedden Road, P.O. Box 1586, Mr. Xu Yiran (Chairman) Grand Cayman, KY1-1110, Cayman Islands Mr. Hu Chung Ming Mr. Chan Chi Yuen HONG KONG BRANCH SHARE REGISTRAR AND TRANSFER OFFICE COMPANY SECRETARY Tricor Investor Services Limited Level 22, Hopewell Centre, Mr. Chan Siu Tak 183 Queen’s Road East, Hong Kong AUTHORISED REPRESENTATIVES COMPANY WEBSITE Mr. Xu Yiran www.leyoutech.com.hk Mr. Chan Siu Tak 2 LEYOU TECHNOLOGIES HOLDINGS LIMITED Annual Report 2018 Financial Highlights Financial Highlights For the year ended 31 December 2018 2017 Change US$’000 US$’000 % RESULTS HIGHLIGHTS From continuing operations Revenue 227,720 166,736 +36.6% Gross profit 141,487 110,774 +27.7% Gross profit margin (%) 62.1% 66.4% -4.3% From continuing and discontinued operations Profit for the year attributable to the owners of the Company 20,413 8,808 +131.8% EBITDA* 66,982 48,084 +39.3% Basic earnings per share (US cents) 0.67 0.30 +123.3% Diluted earnings per share (US cents) 0.66 0.30 +120.0% Dividend per share (US$) Nil Nil N/A As at As at 31 December 31 December 2018 2017 Change US$’000 US$’000 % STATEMENT OF FINANCIAL POSITION HIGHLIGHTS Total assets 310,703 313,431 -0.9% Total borrowings** 42,868 568 +7,447.2% Net assets 230,742 225,994 +2.1% Net assets per share (US$) 0.08 0.07 +14.3% Current ratio 1.50 3.99 -62.4% Gearing ratio*** 13.8% 0.2% +13.6% * EBITDA = Earnings before interest income, interest expense, taxation, depreciation and amortisation ** Total borrowings = Banking borrowings + debenture *** Gearing ratio = Total borrowings/total assets LEYOU TECHNOLOGIES HOLDINGS LIMITED Annual Report 2018 3 Chairman’s Statement Chairman’s Statement 4 LEYOU TECHNOLOGIES HOLDINGS LIMITED Annual Report 2018 Chairman’s Statement Dear Shareholders, On behalf of the board of directors (the “Board”) of Leyou Technologies Holdings Limited (the “Company”, together with its subsidiaries, collectively referred to as the “Group”), I am pleased to present the annual report for the year ended 31 December 2018. Through complete implementation of the corporate objectives and development strategies established in 2017, the Group had successfully achieved a rapid business growth in 2018. Benefiting from the restructuring and optimising of the existing operations by the management, the Group’s profitability gradually increased. During the reporting period, the Group recorded a total revenue of US$227,720,000, an increase of 36.6% over the previous year. Profit attributable to the owners of the Company and the Group’s EBITDA were US$20,413,000 and US$66,982,000, respectively, representing an increase of 131.8% and 39.3%, respectively. Basic and diluted earnings per share was US0.67 cents and US0.66 cents respectively, an increase of 123.3% and 120.0% over the previous year. The Group has set a new record with its live games, made smooth progress in the development of new game products, and reinforced its product pipeline. ADHERENCE TO THE “GAME AS A SERVICE” MODEL BRINGING NEW RECORD HIGH REVENUE AND OPERATING DATA As one of the leading free-to-play online games in the global market, Warframe has been listening attentively to the opinions and suggestions from the player community and is committed to providing players with high-quality game content updates on a regular basis, while continuing to innovate. In the fourth quarter of 2017, we launched the first open world map, the Plains of Eidolon, which presented a combination of hard-core combat and casual social networking. In 2018, we announced an update that included new spacecraft control and battle expansion in Codename: Railjack, which is currently in the development and optimisation stage, causing a sensation in the player community. During the reporting period, Warframe celebrated its fifth anniversary. The passage of time did not lead to the decline of the game’s popularity. On the contrary, it has witnessed Warframe hitting a new record high in 2018. The annual gross revenue of Warframe reached US$194 million, an increase of 35% over the previous year; various operating data such as number of new users, active users, paying users, and concurrent users, continued to break records in the fifth consecutive year. These remarkable achievements are inseparable from the contributions of the Warframe’s experienced team and the loyal support of the players. They also proved the Group’s leading market position as a game developer and publisher in free-to-play online games. IMPLEMENTING IP PRODUCT STRATEGY TO SECURE ANOTHER WORLD-RENOWNED IP LICENSE Since 2017, the Group has developed a short to medium-term product strategy to develop AAA game titles based on world-renowned intellectual properties (”IP”). Besides, the Group obtained in that same year the licenses of Transformers and Civilization Online to develop online games, both being blockbuster IP. Such product strategy will effectively maximise the success rate of new products and help raise the Group’s profile and reputation in the industry. LEYOU TECHNOLOGIES HOLDINGS LIMITED Annual Report 2018 5 Chairman’s Statement During the reporting period, the Group continued this product strategy and successfully obtained the license of the literary works of The Lord of the Rings for the development and publishing a tie-in free-to-play massively multiplayer online (“MMO”) video game. Set in the world of Middle-earth during the years leading to the events of The Lord of the Rings, the game will provide fans throughout the world with new, immersive game experience for epic exploration of the Tolkien universe. In light of the resurgence of interest in The Lord of the Rings IP, this strategic layout is expected to add new growth impetus to the Group. FURTHER GROWTH IN TEAM SIZE AND STRENGTH WHILE ESTABLISHING COMPREHENSIVE SHARED SERVICE PLATFORM FOR ALL PROJECTS After a series of acquisitions and investments in 2017, 2018 was a year of integration and internal expansion. During the reporting period, the Group attracted a large number of game talents worldwide with international vision, further enhancing our strength in game design, development, publishing, and operation. The total number of employees of the Group increased from 722 at the end of 2017 to 889 at the end of 2018. The Group has built a shared service platform to provide a full spectrum of services for internal studios or external developers in product design, technology, art, publishing, and operations. SMOOTH DEVELOPMENT OF NEW PRODUCTS AND IMPROVED PRODUCT QUALITY The Group currently has several new products under smooth development, including Transformers, Civilization Online and other projects. Meanwhile, the Group has set a high bar in product quality and increased its investment in product development. As stated in the announcement dated 7 January 2019, the development loan that the Group intended to provide to Certain Affinity, Inc., the developer of project Transformers, would be increased from US$15 million to US$33 million, to develop and produce richer content, such as in the form of more characters, levels, challenges or missions and a bigger game universe. PUTTING TOGETHER A GLOBAL PUBLISHING TEAM FOR NEW OPPORTUNITIES Gradually building a global publishing, marketing and operation team covering China, North America and Europe, the Group set up a subsidiary named Athlon Games in the Los Angeles area in 2018. The subsidiary will be responsible for global publishing business of the Group, and attracted a team of talents from world’s leading game publishers. The Group’s publishing arm has begun to take shape and has gained recognition by the industry. During the reporting period, attributable to the affirmation of the strength of the Group’s publishing ability, Take-Two signed a game publishing agreement with the Group to grant the global publishing rights of Civilization Online (except mainland China) to the Group.