Revenue growth was weak in the first quarter of 16
In the first quarter of 16, revenue rose 19% year-on-year to 194.6 million yuan, lower than we expected; adjusted net profit fell 18.6% to 32.8 million yuan, higher than we expected.
Trend of development
PC games are growing strongly compared with the same period last year. PC game revenue increased 59% year-on-year to 107.7 million yuan, mainly due to the stable endogenous growth of WPT and PC games. We expect PC games to achieve double-digit endogenous growth in the first quarter of 16, mainly due to Texas hold'em 's contribution. PC games are expected to maintain a strong growth momentum in the coming quarters.
Mobile games are expected to pick up. Mobile gaming revenue fell 31 per cent to 6.57 million yuan in the fourth quarter of 15 compared with the same period last year, mainly due to operators clearing SMS toll channels (SMS-billing channels) in the fourth quarter of 15, while there was no such impact in the first quarter of last year. Mobile paid users fell 26% year-on-year, and average revenue per user fell 22%. Lianzhong has advised customers to replace operators' toll channels with Wechat and Alipay. We expect mobile revenue growth to pick up in the second quarter.
Other income is expected to accelerate in the second quarter of 16 and in the second half of 2016. The first quarter was an off-season for other income (mainly including sponsorship and media copyright). The number of WPT and other events is not large due to the influence of the Spring Festival. We expect other revenue to accelerate in the second quarter of 16 and the second half of 2016, mainly due to: 1) Season 15 will begin in April and more WPT events will be held in the coming quarters; 2) WPT media rights are expected to be granted to Chinese partners in the second quarter of 16, boosting revenue.
Profit forecast
We maintain our 2016 GAAP 17 annual revenue forecast of 1 billion yuan / 1.3 billion yuan and non-GAAP net profit of 208 million yuan / 219 million yuan, or 0.25 pesos per share (corresponding to HK $0.287 pesos 0.302).
Valuation and suggestion
We maintain our recommended rating on Lianzhong, but as market valuations have fallen considerably from last year's highs, we have lowered our price-to-earnings ratio to 17 times 2016 and our target price by 44% to HK $4.8.
Risk.
Fierce competition in the market; uncertainty of new business.
