The decline in the company's quarterly performance is in line with our expectations and is expected to improve in the fourth quarter.
The two new games, Legend of Zhen Huan and the Chronicles of the three Kingdoms, will bring considerable recharge in the fourth quarter.
Maintain neutral rating and target price HK$5.33
Summary of 3Q15 performance: many unfavorable factors led to a decline in revenue and profit margins of the company. Blueport Interactive 3Q15 revenue was 116 million yuan, down 34% from the same period last year and 38% from the previous month. The quarterly adjusted net loss to parent shareholders was RMB 8.37 million, while the adjusted net profit for 3Q14 and 2Q15 to parent shareholders was RMB 46.65 million and RMB 75.02 million, respectively. We believe that the main reasons for the significant decline in quarterly revenue and net loss are: 1) 3Q15 delayed the release of several products due to adjustment of organizational structure and adjustment of new product release plans; 2) the original games fell rapidly due to market competition; 3) the increased proportion of agent games and the relatively low flow of Apple Inc iOS led to a decline in gross profit margin.
"Zhen Huan Zhuan" and "random play of the Chronicles of the three Kingdoms" are expected to contribute considerable revenue in the fourth quarter. As Zhen Huan performed generally well in the first month after the full channel launch on October 10, the ranking of the best-selling list in iOS China remained at the 15th-25th place most of the time, plus the company's management confirmed in the performance call that "random play of the Annals of the three Kingdoms" will be launched in December. We believe that there is a low probability that the company's revenue will continue to decline in the fourth quarter compared with the previous quarter. However, considering the company's continued investment in R & D resources and the possibility of warming up the market for the New year's game season, we believe that the company's expenses may increase in the fourth quarter, putting pressure on the company's net profit level.
Pan-Entertainment is still an important focus of Langang in 2016, the company will continue to follow the development strategy of Pan-Entertainment, centering on the goals of boutique, entertainment and internationalization, looking for new development opportunities in improving the quality of games and opening up the international market. At the same time, new business entities born around "pan-entertainment", such as Blueport Pictures and Axe Interactive, are also expected to launch new products and generate revenue in film, television and home hosting. In terms of game schedule, we believe that "Shushan War" and "Legend of Miyue" are important points to watch. Two boutique games adapted by IP are expected to bring considerable revenue to the company in 1H16, while "Young Bee", "Legend of the White-haired Witch" and the original boutique games of Blue Port will also become important IP resources.
Valuation and rating
As we have lowered our earnings forecast and target price after the release of the quarterly earnings warning, and the financial position of the company's 3Q15 is broadly in line with our expectations, we still maintain our neutral rating and target price HK$5.33.