Performance review
2H21 income exceeds profit warning limit 1%
IGG announced that 2H21 revenue fell 7 per cent year-on-year to HK $2.81 billion, exceeding the profit warning limit by 1 per cent, mainly due to a slightly higher-than-expected net loss of HK $64.5 million (corresponding to a loss rate of 2.3 per cent) and a profit of HK $540 million in the same period in 2020, mainly due to a substantial increase in sales and R & D expenses. The board of directors announced that the second interim dividend for 2021 would not be paid in view of increased competition in the industry and the company's short-term losses.
Trend of development
Due to the influence of external adverse factors, the running water of the Kingdom era (LM) continues to be under pressure for a short time. By the end of 2021, the number of LM registered users had reached 490 million, with a net increase of 50 million in half a year, while MAU decreased by 40% to 12 million compared with the previous month, mainly because the company reduced its marketing efforts during the peak year-end e-commerce season.
The revenue of the game 2H21 was HK $2.28 billion, down 17% from the previous month, with an average monthly flow of HK $440 million for the whole year, slightly higher than the same period last year. However, due to intensified competition in overseas markets and the conflict between Russia and Ukraine in 2022, losses in the Russian language market continued to expand, and the average monthly flow of 1Q22 fell to HK $380 million. The company said that if external adverse factors continue, the Russian language market is expected to lose nearly HK $200 million for the whole of 2022. At present, the company is committed to promoting the recovery of running water by introducing new ways of playing and increasing marketing expenditure. Given the recent external uncertainty, we expect Kingdom era revenues to fall 15 per cent to HK $4.27 billion in 2022 compared with the same period a year earlier.
The performance of the new tour is not as good as expected. As of the end of 2021, the MAU of "Princess of time" was 1 million, with an average flow of about HK $28 million per month in 2021, with a slight decline in 2H21 month-on-month, and the company continues to optimize play and enrich game content. "Mythical Heroes" was officially launched in October 2021, with a flow of nearly HK $30 million in November, but the subsequent retention of users was not as expected. The company stopped its large-scale promotion in December and dropped to HK $10 million in February. The company said that its focus has shifted to game content development and is expected to increase its promotion efforts after the launch of the new version in April. The company expects "Yeager"
Will be officially launched in 3Q22, the current test user feedback is good; "Project OG" and "ProjectMR2.0" are also expected to be launched in 2022. In addition, the company said that there are still more than 20 products in the product line, half of which are SLG categories, as well as female, action, placement and other games.
In terms of profit margin, the 2H21 sales expense rate increased by 6.2ppt to 36.2%, and the R & D expense rate increased by 13.6ppt to 26.9%, mainly due to the launch of new games and the continuous expansion of the number of R & D team personnel. Against the background of uncertainty, we expect revenue to fall 14 per cent year-on-year in 2022, sales and R & D spending rates of 40 per cent and 27 per cent respectively in 2022, with a net loss of HK $420 million and a net loss rate of 8.1 per cent.
Profit forecast and valuation
Due to the pressure on the revenue of the old games, the uncertainty of the new games is high. The revenue forecast for 2022max in 2023 is cut by 21% and 24% respectively to HK $5.18 billion and HK $5.21 billion, respectively, and the adjusted net profit in 2022 is reduced from HK $660 million to a loss of HK $350 million. The adjusted net profit in 2023 was reduced by 40% to HK $470 million. Maintain neutral rating, taking into account earnings forecast adjustment and more new online since April this year, and LM long-term product quality is stable, lowering the target price by 13% to HK $4.80, compared to the current 21% upside, corresponding to 12x 2023 adjusted PE, the current share price trading in 10x 2023 adjusted PE.
Risk.
The progress of the new tour is not as good as expected, the cost or expense is higher than expected, and the geopolitical and regulatory risks.