CMGE Technology's first-half results fell short of our expectations, primarily due to declining revenue from legacy mobile games and delays in new-game launches. While we have factored in a revenue drop from the older titles, the decline occurred earlier than expected. However, given most of our long-term revenue forecasts hinge on the scheduled late 2024 release of Sword and Fairy: World, we keep our estimates unchanged for now. As a result, we maintain our fair value estimate for CMGE at HKD 2.40 but lift the firm's Morningstar Uncertainty Rating to Very High from High due to increasing competition in the gaming industry.
In the first half of 2024, CMGE's revenue declined 20% year over year, significantly underperforming the industry's double-digit growth. This weakness is largely due to changing preferences among Chinese gamers, who are increasingly drawn to high-quality games, leading to a diminishing appeal for CMGE's under-resourced legacy titles. Acknowledging the need for better games, management has heavily invested in Sword and Fairy: World. Having tested the game ourselves, we believe this title will significantly improve CMGE's financial performance in the subsequent quarters following its official launch.
Our model baked in around an annualized revenue contribution of CNY 1.7 billion from Sword and Fairy, which is a fraction of the CNY 8 billion generated by NetEase's similar title, Justice Mobile, in its debut year. The reason we estimate a much lower revenue figure for Sword and Fairy is due to the intensified competition within the open-world genre since 2023. Additionally, the potential overlap with the release of another NetEase open-world title, Where Winds Meet, could lead to players diversion, negatively affecting the performance of Sword and Fairy.
CMGE reported an adjusted operating income of CNY 32 million for the first half, a decrease of 28% compared with the previous year. The group also recorded a net loss of CNY 236 million, primarily due to impairment charges on several gaming companies in which it had invested. With the anticipated release of Sword and Fairy later this year, we expect the company to return to profitability in the second half.