Financial review
Liberal Arts Interactive achieved revenue of 170 million yuan in the first quarter, down 30% from the previous year. Among them, the net game and mobile game revenue split fell 33.8% year on year and 27.7% year on year to 660 million and 1.04 billion yuan. The revenue decline was mainly affected by the decline in the online game industry trend and operators' control of payment channels; operating costs fell 44.3%, mainly because the company adjusted its cost and personnel structure; the cost drop led to a 9.3% year-on-year increase in gross margin to 63.1%, and the profit margin increased 11.411.4% year-on-year to 35.03% . Adjusted net profit increased 8.5% year-on-year to 67 million yuan. Excluding the impact of one-time income from the sale of Leishang's shares in the fourth quarter of 2015, the year-on-month increase was also realized. Weak earnings per share increased 5.8% year over year to 8.33 points. Furthermore, the company has sufficient cash reserves and has 1.07 billion dollars in cash on hand, providing a guarantee for subsequent investments and purchases.
Judging from operating data, the share of mobile games in total revenue increased 2.1 percentage points to 61%. Paying players were basically the same as in 2015 Q4, at around 1.7 million, while 2015 Q4 dropped 17.2 percentage points over the previous quarter; the number of active daily users fell 5.4 percentage points month-on-month, while the number of active users in 2015Q4 fell 10.7%; monthly active users fell 6% month-on-month, while the number of active users fell 9.8% month-on-month in 2015 Q4. Despite the fact that many user data are still declining, the downward trend has clearly been reduced.
Our opinion
Liberal Arts Interactive is an industry-leading chess online game company, and has a mature business model. It has two classic games, Texas Hold'em and Grounds, and will benefit from the long life cycle of board games. Furthermore, we note that in 1Q2016, the company will 1) focus on R&D and innovation, improve the user experience, and increase the game product mix to 44 models, 2) organize various online and offline events to stimulate the increase in user volume, 3) promote diversified payment methods from SMS to WeChat and Alipay, 4) cooperate with Levision to develop a new model of live streaming and interaction for board games. Under the influence of online game industry trends, the company has taken active countermeasures, which I believe will drive continuous improvement in operating indicators.
Investment recommendations
Although revenue declined in the first quarter, many operating indicators improved, and it is believed that the company's performance has bottomed out and recovered. The estimated 2016/2017 EPS is 0.28/0.32, and the target salary is HK$3.00, maintaining the increase in holdings. Now now now 6/30
Risk Alerts
The recovery in business performance was lower than expected;
Mobile games are fiercely competitive;