Company background: established in 1997, Pak Neng Group mainly manufactures video graphics cards for ODM/OEM customers and produces and promotes video graphics cards and other PC products under its own ZOTAC, Inno3D and Manli brands. The company's relationship with two major international GPU suppliers, NVIDIA and AMD, enables the Burneng Group to provide customers with cost-competitive, high-performance products and solutions. Pak Neng Group provides electronic manufacturing services (EMS) to world-renowned brands and produces products for point-of-sale and suppliers of ATM systems, healthcare products, LED modules, etc. In addition to the video display card and EMS business, Pak Neng Group also produces and sells other PC-related products of its own brand (in the form of ODM / OEM), such as mini PC and motherboard, and earns revenue from transaction components. Pak Neng Group listed on the Hong Kong Stock Exchange on January 12, 2012, issuing 105 million shares at a price of HK $1.60 per share. Pak Neng Group is the only manufacturer of AMD reference video graphics cards and one of the top five brand partners of NVIDIA video graphics cards. Burneng Group has an experienced and innovative R & D team with more than 170 members (including 120 engineers) and strong product and design experience, enabling the company to provide customers with innovative and reliable technologies, products and services.
E-sports bring fast-growing demand. E-sports (eSports) is developing rapidly all over the world, and has become an important part of the video game industry. E-sports are usually divided into several main types: (a) combat games, (b) first-person shooting, (c) real-time strategy, (d) sports games, and (e) multiplayer online battle arena (MOBA). Because of the great differences between different video games, professional players / players tend to focus on a single type. SuperData, an independent research firm, predicts that global e-sports industry revenue will grow from $748 million in 2015 to $1.9 billion in 2018. Newzoo, the global gaming research company, predicts that e-sports revenues, which were $325 million in 2015, will grow at an average annual compound growth rate of 40 per cent and reach $1.1 billion in 2019. Newzoo estimates that revenue sources for e-sports include advertising / sponsorship (77 per cent), gambling (7 per cent), prize pools (7 per cent) and amateur micro tournaments / ticket sales. China's electronics industry has developed for more than 10 years and has achieved explosive growth in recent years. According to iResearch, the number of e-sports players in China will reach 170 million in 2016, an increase of about 80 million over 2014. China's e-sports industry is booming mainly due to: (a) government policy support for the e-sports industry; (b) increased demand; (c) the emergence of Internet platforms such as live streaming; (d) increased participation of Internet giants; and (e) alliances between game developers and platforms. According to Activision, e-sports 's competitors and viewers spend 30 per cent more on game hardware and software than the average player. The rise of e-sports has created business opportunities for GPU manufacturers (NVIDIA and AMD) and their partners (Burneng Group and MSI), as the increased viewing and participation rates of e-sports enable more general players to upgrade the quality of their graphics cards.
VR-related growth potential: the company has released its ZOTAC-branded VR dedicated computer backpack (the first generation launched in April 2016 and the second generation VR GO in October 2016). VR computer backpacks are designed to prevent wire entanglement and tripping because VR users do not have to connect to desktops. The VR computer backpack is powered by two lithium batteries and can run for two hours at a time. VR GO has a battery hot-swappable function that allows players to play for a long time. Wire logistics has also become more convenient because the shell and output are designed to provide a better VR experience for players. The HDMI and USB outputs are located at the top of the device, and the shell is designed to allow players to store wires when they are not using the device. The market also expects that VR will become more and more popular and drive the demand for independent graphics cards and motherboard upgrades. Both HTC Vive and Oculus Rift need to connect to PC with higher hardware specifications (especially stand-alone graphics cards). The Burneng Group and its peers such as MSI and Gigabyte (designing separate graphics cards for NVIDIA and AMD GPU) are all beneficiaries of the sustainable development of VR technology.
Summary of results for the first half of 2016: the company's total turnover increased by 20.4% year-on-year to HK $2.4985 billion (HK $2.0756 billion in the first half of 2015). The increase in turnover during the period was mainly due to revenue growth in all businesses (including video graphics cards, EMS and other PC-related products and components). The net profit of Pak Neng Group in the first half of 2016 was HK $36.5 million, compared with a net loss of HK $28 million in the first half of 2015.
The prospects for 2016 and 2017 are bright. With the launch of new VGA products with NVIDIA GTX 10 series graphics cards, Parneng is expected to receive a boost in the second half of the year. The company's net profit in the second half of 2016 is expected to increase year-on-year and month-on-month. We estimate that the company's current price-to-earnings ratio for 2016 is a single number. The company's management believes that the growth momentum will continue in 2017. The company will promote its own brand of game notebook computers to expand its product portfolio and capture the opportunities brought by the VR and e-sports markets. The company was in a net cash position in the first half of 2016 and its sound financial position will support future growth.
Our point of view: Burneng Group can be seen as a beneficiary of the rapid growth of the e-sports industry. And the growing popularity of VR technology will also benefit the company. Although the market capitalization is relatively low and trading liquidity is low, given that Baineng Group has VR and e-sports businesses, and the valuation is lower than that of its peers, we think the share is worth noting. We suggest that investors should pay attention to Pak Neng Group. If the share price falls, it will bring opportunities for renewed attention.
Catalysts: (1) news about the launch of new products; (2) announcement of 2016 results; (3) mergers and acquisitions; (4) more investors and analysts pay attention to the shares.
