China's leading boutique game developer, backed by high-quality capital. Celadon Games was founded in 2012 and has always been committed to providing high-quality mobile games to players at home and abroad. Yang Xu, the founder of the company, has been deeply involved in the game industry for more than 15 years. Many executives have worked for outstanding companies at home and abroad, with rich experience in management, technology, finance, and marketing. The core management team members have collaborated with the company for more than eight years, demonstrating a mature business structure and long-term talent stability. On December 16, '21, Celadon Games was officially listed on the main board of the Hong Kong Stock Exchange. As of January 10, 2022, Gibbit (18.55%), Tencent (4.33%), Alibaba (5.34%), and Bilibili (4.33%) were important strategic shareholders of Celadon Games.

Based on the casual and RPG market segments, online games have performed well. According to the number of games developed independently, the number of celadon games and casual games and Rogue-like RPGs in 2020 was in the top three in China. Among them, in 2016-2020, the Rouge-like RPG game market size grew at a compound annual rate of 39.2%, and the market potential can be anticipated. The company is currently developing 6 games, 4 of which are self-developed, and their unique style of drawing and rich gameplay have been highly recognized by the market: 1) “The Strongest Snail”: “The Strongest Snail”: A placement-type game launched in 2020, with sales exceeding 400 million yuan in the first month, with an average MAU4.42 million people, ranking second in China's iOS game bestseller list. 2) “Incredible Maze”: Launched in 2016, one of the benchmark games for Rouge-like RPG games in China. In 2021, the game recorded a total turnover of about RMB 50 million, with an average MAU of more than 218,000 people. 3) “Lanterns and Dungeons”: Launched in '21, the first month's turnover exceeded 185 million yuan. 4) “Ares Virus”: Launched in '18, it once topped the list of paid iOS games in China, with more than 16 million registered players as of December 31, 2021. 5) “Endless Adventure”: Launched in '15. As of December 31, 2021, the game was “recommended by the editor” more than 150 times on the Chinese iOSApp Store and received the highest rating of 4.7 out of 5.0. The game has accumulated over 1.9 million registered players. 6) “Yu Gong Yishan 3 - Zhi Sou's Counterattack”: Released in '17.

High-quality R&D capabilities continue to incubate quality products, and subsequent reserves are abundant. The average team members have worked for the company for more than three years. They are experienced and have clear functions. In 2020, they were nominated by the Game Industry Committee as the top ten game development teams in China. In 2019-2021, the company's R&D expenses were 26 million yuan/146 million yuan/91 million yuan respectively. In the future, it will continue to focus on R&D and construction. 35% of the capital raised from the company's listing will be used to expand the company's game product portfolio and invest in the company's game R&D capabilities and related technology. Self-developed technology and product development will be the development direction Celadon Games will focus on most. The company also has more than ten games in its inventory, including “Time Travel Agency”, “Project Demon Slayer 2”, etc., covering various genres such as RPG, casual games, SLG, ACT and STG, and continues to enrich its product matrix. It plans to launch three new games in '22, “Time Travel Agency”, “Project Enchanter”, and “Rider Punch the Duck”, and release the Japanese version of “The Strongest Snail” in the same year.

Embrace a young community and focus on stickiness and strong retention. Celadon Games has a huge, loyal, and active player community. By the end of '21, the company had 10.53 million “celadon fans”, of which WeChat and TapTap had 3 million+ and 5 million+ followers, respectively. Close community interaction has increased player stickiness and retention. Among them, as of June 30, 2021, the average weekly user retention rate of the six celadon games was above 20%, all well above the average of the RPG, Rogue-like RPG, casual games, and placement-type game industries during the same period.

Investment suggestions: The company has strong monetization capabilities for many games, a stable life cycle for old games, and abundant reserves for subsequent games; excellent management and R&D teams are supported by major companies such as Tencent and Ali, and future growth is worth looking forward to. We believe that the revenue of celadon in 22-23 was 1,548 million yuan/3,015 million yuan, an increase of 39.96%/94.82% over the previous year; net profit attributable to ordinary shareholders was 412 million yuan/903 million yuan, an increase of 211.82%/118.94% over the previous year. The corresponding valuation is 7×/3×. We gave the company 10xPE as its main business for 22 years, with a corresponding target price of 5.96 yuan (HK$7.00), which covered a “buy” rating for the first time.

Risk warning: the risk of increased competition in the market, the risk that new game products will be launched or that their performance falls short of expectations, version distribution falls short of expectations, and overseas market expansion falls short of expectations.