2016 performance was lower than expected
Lianzhong announced its 2016 results: revenue of 871 million yuan, an increase of 13% over the same period last year, and non-general net profit of 191 million yuan, an increase of 18% over the same period last year, corresponding to a profit of HK $0.26 per share. The company's revenue was 9% lower than the consensus, but its profit was basically in line with expectations.
Trend of development
The company's game sector is expected to face challenges. The growth of mahjong and landlord games was slow in the fourth quarter of last year due to fierce competition in the market, and we expect this situation to continue. However, we expect Texas hold'em to achieve a growth rate of 2530% in 2017 because of the rapid expansion of PlayWPT games (considering the upcoming launch of the new season of WPT on Fox, PlayWPT is expected to receive considerable traffic, and the advertising budget may increase in 2017), and the increase in offline activities (especially after the second quarter) attracts traffic. The overall growth rate of the game sector is expected to be 1015% in 2017.
Look for surprises in your new business. In 2016, in addition to competitive two-to-one, the Chinese intellectual sports platform was approved three additional games, and about 10 are expected to be approved in the first half of 2017. We expect that through bidding, authorization and distribution, the Chinese intellectual sports platform will contribute about 25 million yuan in operating profit. In 2017, WPT will add two other offline major events in China. We expect the non-game sector to maintain a growth rate of 4050% in 2017.
Profit forecast
The revenue forecast for 2017 will be cut by 24% to 996 million yuan, and the non-GAAP net profit by 14% to 188 million yuan, reflecting the challenges that the game sector may face. The introduction of 2018 revenue is expected to be 1.16 billion yuan (year-on-year growth of + 17%), non-GAAP net profit is expected to be 230 million yuan (year-on-year growth of + 22%).
Valuation and suggestion
At present, the company's share price is equivalent to HK $3.18. Given future uncertainty, the recommendation is maintained but the price is reduced by 15% to HK $4.1, based on a price-to-earnings ratio of 16 times 2017 earnings.
Risk
Fierce competition in the market; uncertainty of new business.
