Strong revenue growth in the second quarter
Lianzhong announced second-quarter results: revenue was 221 million yuan, up 38% from the same period last year; non-general criteria net profit was 64.15 million yuan (exceeding the consensus forecast of 51 million yuan), up 46% from the same period last year, corresponding to earnings per share of 0.08 yuan.
Trend of development
The game business performed well in the quarter. In the first half of the year, PC games increased by 38% to 205 million yuan, maintaining a strong momentum. Mobile games fell 5% year-on-year to 167 million yuan (an increase of 26% month-on-month), indicating that the business is recovering from operators' clean-up of SMS revenue channels, in line with our expectations. We expect PC games to maintain double-digit growth, and mobile games business growth to resume: 1) third-party payments will begin in the second quarter; 2) promotional activities will be carried out in the second half of the year; and 3) cooperation with smartphone manufacturers will become closer.
Business expansion is expected to accelerate in the second half of the year:
The latest WPT social casino games (PlayWPT brand), including poker games and slot machine games, will be launched soon.
The partnership with Migu is expected to accelerate in the second half of the year, benefiting the user base and payment conversion rates.
The non-game sector (currently mainly from events and IP licensing sponsorship fees) accounted for about 11% of revenue in the first half of the year. We believe that the non-game sector will further drive growth in the future.
Profit forecast
Considering that the company is still recovering from the impact of the first quarter, it adjusted its revenue forecasts for 2016 and 2017 by-1.3% and 0.0% to 1.01 billion yuan and 1.32 billion yuan, respectively, and adjusted net profit by 1.8% and-0.4% to 212 million yuan and 218 million yuan, respectively, corresponding to non-GAAP earnings per share of 0.26 yuan and 0.26 yuan, respectively.
Valuation and suggestion
The company currently trades at HK $3.59, maintaining its recommended rating and target price of HK $4.80, based on a price-to-earnings ratio of 16 times FY16's annual earnings.
Risk.
Market competition intensifies; new business uncertainty.
