I. Performance Overview
The company's revenue in 2019 was 2.15 billion yuan, down 21.1% from the previous year; the net profit of the mother was -2.40 billion yuan, compared to 840 million yuan in the same period in 2018. The loss in performance was mainly due to the company's impairment of goodwill on related subsidiaries, including Hangzhou Zhexin, the accrual of bad accounts receivable, and the impairment of long-term equity investments and intangible assets.
II. Analysis and Judgment
The performance is in line with expectations, the company's impairment has been completed, and the future will go to battle lightly
Earlier, the company released a performance forecast. It is estimated that the net profit growth rate for the full year of 2019 will be 2,395-2.4 billion yuan, and the earnings report will lose 2.40 billion yuan in net profit of Gomu, which is in the middle of the performance forecast. Jinke Culture's assets for which goodwill impairment has been calculated this time mainly come from its subsidiary Hangzhou Zhexin Company. Hangzhou Zhexin's distribution business declined due to restrictions on distribution of edition numbers, a decrease in upstream game developers, restrictions on operators' value-added services, and the company's active strategic adjustments. As a result, the company accrued partial goodwill impairment on related assets, including Hangzhou Zhexin. As of 19H1, the company's goodwill totaled 6.26 billion yuan, mainly Outfit7 (parent company of Tom Cat, with less risk of impairment of goodwill) of 3.65 billion yuan and Hangzhou Zhexin was 2.32 billion yuan. The company's impairment of goodwill, accounts receivable, long-term equity investment and intangible assets was completed, and the future was lightweight.
In the future, the company will focus more on the operation and development of a global IP ecosystem centered on the “Talking Tom Family” IP.
The Tom Cat series application has performed well, online and offline business collaboration, and continuous optimization of the product matrix
The company is currently focusing on the “Talking Tom Family” IP to develop online and offline business. From “Talking Tom Cat” in 2010 to nurturing games such as “My Tom Cat 2” and “My Angela,” the value of Tom Cat's IP continues to deepen. With the company's subsequent launch of casual games such as “Tom Cat Parkour” and “Tom Cat's Adventure”, there are currently about 20 games operated online. The company's Tom Cat series apps have been downloaded more than 9.5 billion times, and the world's monthly activity has reached more than 350 million. The company's online business includes advertising revenue and animation business. Currently, Tom Cat cartoons have successively landed on the CCTV Children's Channel and platforms such as Huashu, BaiTV, Mango TV, Netflix, etc., and have been broadcast more than 40 billion times worldwide; offline businesses include the Tom Cat Family Park store and IP derivatives sales. By the end of 2019, three Tom Cat Family Parks had opened in China. In terms of derivatives and IP licensing, the company has developed nearly a thousand SKU products, which may become future growth points for the company's business.
Backed by ByteDance's deep cooperation, the advertising business has outstanding monetization capabilities
In terms of advertising business, the company reached a strategic cooperation with Pangolin Alliance, a leading mobile traffic platform. It is expected that Pangolin will help it increase customer unit prices and ARPU value. In 2019, the Q4 company connected to the Pangolin SDK. Since Pangolins can connect to more native advertisements, the unit price of the company's customers increased. Furthermore, based on the accurate headline algorithm, the ad conversion rate increased markedly, driving the improvement of purchasing efficiency. Cooperation platforms for overseas advertising business have also continued to expand. Currently, the company has formed strategic partnerships with DSP advertising platforms, including Google, Facebook, Twitter, Apple, etc.
III. Investment Suggestions
We expect the company to achieve earnings of 0.28 and 0.33 yuan per share in 2020-2021. The corresponding PE is 15X and 13X respectively. We are optimistic that the company's Tom Cat series of games will enhance the company's performance, and at the same time, the future collaborative development of online and offline business will further release profits. Currently, the company's PE (TTM) is in the 5.3% quartile since 2016, maintaining the “recommended” rating.
IV. Risk Reminder
Game version limit risk; game launch falls short of expected risk; overseas policy risk