Update: the company announced 1H16 results after the market closed on August 12, which was lower than market expectations. The company issued a negative profit warning on July 26.
1H16 continues to lose money. The company's 1H16 continued to lose money, with a loss of 51 million yuan for its main business, while a loss of 67 million yuan for 1H15 (excluding the increase in the fair value of financial investment of about 77 million yuan) and a loss of 62 million yuan for 2H15. Revenue rose 10 per cent year-on-year to 330 million yuan, mainly due to the contribution of its own development of a new game, "Shushan War period". 1H16's net profit margin is-15 per cent, compared with-9.6 per cent for FY15.
The focus has shifted to self-developed games to boost gross profit margins. The company is shifting its focus from licensed games to self-developed games with higher margins. 1H16's revenue from indigenous R & D games rose 81 per cent year-on-year, with its revenue contribution rising from 42 per cent of 1H15 to 70 per cent of 1H16, while licensed game revenue fell 42 per cent, from 58 per cent of 1H15 to 30 per cent of 1H16. The company's gross margin rose from 40 per cent of 1H15 to 49 per cent of 1H16.
Operating margins continue to be under pressure. Despite the increase in gross profit margin, the company's operating margin continued to be under pressure, with 1H16 operating margin of-9.1%, compared with 0.5% of 1H15 and-26.8% of 2H15. The operating loss is mainly due to the "Shushan War period".
The expenditure on the development and promotion of new games such as mobile games is relatively high, and the performance of these new games has not met the company's expectations.
Lower the full-year profit forecast. We believe that due to the continuous concentration of market share to large platforms such as Tencent and NetEase, Inc, and the increasing operating costs of mobile games, the business environment of small mobile game operators is becoming increasingly difficult. If there are not enough successful cases of the new game and the lack of effective operating cost control, it will be difficult for the company to make a profit in the next two years. We lowered FY16's net profit forecast from 68 million yuan to a loss of 53 million yuan.
The profitability of new business development is low predictable; the rating is downgraded to "hold". The company is striving to make breakthroughs in new areas such as game-themed film investment, console games and virtual reality games. We believe that the profit contribution of these new businesses is very low in the short term. The company's rating was downgraded to "hold" from "overweight", while its target price was lowered from HK $4.74 to HK $3.67, based on 10 times FY17E P Bank E and HK $2.16 in net cash per share at the end of FY16.
