The third quarter of 2016 results are in line with expectations.
Lianzhong announced its results for the third quarter of 2016: revenue of 227 million yuan, an increase of 10% over the same period last year; non-general criteria net profit of 57 million yuan, an increase of 27% over the same period last year, corresponding to earnings per share of 0.07 yuan. The results for the third quarter of 2016 are basically in line with our expectations.
Trend of development
The growth of the game sector is steady. Revenue from PC games and mobile games was 93 million yuan and 103 million yuan respectively, up 9% and 14% respectively from the same period last year, and mobile game revenue remained at an all-time high. The payment rate remained stable at 6.4%, and the average income per user was 31 yuan in the third quarter of 2015, down from 34 yuan in the first half of 2016, mainly due to stronger growth in the mobile game sector with lower average income per user.
Pay attention to PlayWPT and Chinese intellectual sports platform in the fourth quarter. At the end of August, PlayWPT was launched on the web page / Facebook Inc, and a mobile platform version of PlayWPT was launched in early October. At present, PlayWPT is still in its infancy and faces fierce competition from mature competitors, so we need more time to confirm its success. In addition, the first National Athletic two-to-one Poker Championship (CCPC), held on September 3, will begin to drive revenue and profit growth in the fourth quarter.
Benefit from improved profit margins. The adjusted net interest rate in the third quarter of 2016 was 25%, an increase of 3 percentage points over the same period last year. The restructuring in the first quarter and lower R & D costs due to bookkeeping in previous quarters helped boost the company's profit margins. We expect profit margins to continue to improve in the coming quarters.
Profit forecast
Considering that the company's profit margin will increase, we have raised our earnings per share forecast for 2017 by 3% from 0.26 yuan to 0.27 yuan. However, the expected revenue for 2016 and 2017 was cut by 0.6 per cent and 5.8 per cent to 1 billion yuan and 1.24 billion yuan respectively, reflecting the impact of the decline in average income per user.
Valuation and suggestion
At present, the company's share price is equivalent to HK $3.48. We maintain our recommended rating and target price of HK $4.80, which is 37.93% upside from the current share price. Based on a price-to-earnings ratio of 16 times 2016.
Risk.
Increased market competition; uncertainty of new business.