Company News We recently met with Liberal Arts management to learn about the latest business developments and future game plans for the company's main gaming and payment channels. Liberal Arts is one of the few leading game developers and operators focusing on card games in China and ASEAN countries. Currently, it operates 55 self-developed games. Among them, “Texas Hold'em” and “Landlord” are the best-selling games, accounting for 76% and 11% of revenue in the first half of 2016, respectively. The profit visibility of the notes is high. Card games generally maintain long-term growth in ARPU (average revenue per user) and customer base due to stable player stickiness and spending behavior. As a result, most classic card games have a longer life cycle than trend-driven games. For example, Liberal Arts's flagship game “Texas Hold'em” has been in operation since 2008, and has built a strong brand reputation and a strong player network. In the long run, the characteristics of card games help increase the profit visibility of liberal arts. Actively expand. Liberal Arts relies on publishers such as Facebook, App Store, and Weibo to distribute content, and allows players to make in-app purchases through payment channels such as telecom, Alipay, and Tenpay. Looking forward to the future, in order to diversify the range of game products, Liberal Arts is currently developing more board games with local characteristics to satisfy players with different cultures and preferences in the Chinese and overseas markets. Liberal Arts plans to increase the number of games from the current 55 to over 100. In order to expand its customer base, Liberal Arts collaborates with telecom companies to pre-install games and host offline contests (such as the Liberal Arts International Poker Contest) to attract new customers and strengthen customer stickiness. There is good potential to increase gross margin. In 2015, Liberal Arts was adversely affected once by telecom companies changing the SMS billing system, which prompted it to transfer payment channels to third-party payment platforms such as Alipay and Tenpay. Generally speaking, telecom operators charge 30-35% of total revenue, while third-party payment platforms only charge 1-3%. 16 In the first half of the year, transactions using Alipay/Tenpay payments increased to more than 20% of the total, driving Liberal Arts's gross margin to jump 13 percentage points to 64% year-on-year during the same period. As the Group continues to expand and improve its payment system, gross margin is expected to continue to grow. The outlook is bright. Liberal Arts is actively strengthening its game product portfolio and payment channels, and management is optimistic about business prospects in 2016. Liberal Arts 16's recurring net profit increased by 52% in the first half of the fiscal year, and the compound annual growth rate of 2012-15 earnings was 16%. Mr. Zhang Wei, the founder of the company, and his family own 32% of the shares. According to Bloomberg's forecast, the current stock price is equivalent to 13/12 times the projected price-earnings ratio for the 16/17 fiscal year. Compared with other online game vendors listed in Hong Kong, Liberal Arts's valuation is reasonable. Liberal arts fundamentals are solid, with significant growth in FY16, and we recommend investors pay attention. Key risks include increased competition in the industry by Tencent and other rivals.