Deepening internal business and management reforms, key new products can be expected. For the first time, PalmFun Technology, which has given a “increase in holdings” rating, is an industry-leading mobile game developer, operator, and publisher. The company has upgraded and optimized its internal management structure, continuously promoted strategic transformation and development, and accelerated the process of R&D and operation integration. The company's 21H1 key new products “National Miracle 2” and “Tides of Darkness: Contract” are all represented by Tencent. The scale of sales and revenue contributions are worth looking forward to. We expect the company's revenue in 2020 to be 1,698/2551/306 billion yuan respectively, and Guimu's net profit of 618/9.13/1,152 million yuan respectively, and the corresponding EPS is 0.22/0.33/0.42 yuan respectively. Considering that the comparable company Wind unanimously expected an average PE of 16X in 2021, the company was given the same valuation of 16X PE in '21, with a corresponding target price of 5.28 yuan, covering the “increase in holdings” rating for the first time.
Premium IP games have strong revenue generation capabilities. Key new products are expected to drive high revenue and profit growth starting in '21. The company successfully created a multi-category game layout through outreach development. Among them, MMO and card games built around classic IPs showed outstanding performance. Key products such as “National Miracle”, “King of Fighters 98: Ultimate Battle OL”, and “Miracle: Awakening” brought major revenue contributions to the company. According to the company's announcement, the first year of the launch of the three games, the new game “One Superman: The Strongest Man: The Strongest Man” contributed to the company's total revenue of 20H1. 38.8%. In November 2020, PalmFun obtained IP authorization, and “Street Fighter: Showdown” developed by Beijing Youle went live in public beta. 2021H1 will welcome key new products. The miracle IP sequel “National Miracle 2” based on Unreal Engine 4 and the ARPG “Tides of Darkness: Contract” were distributed by Tencent, which is expected to become leading products in their respective categories, bringing significant performance increases.
Deepening the integrated transformation of R&D and operation, building a global distribution system, and building the company's core competitiveness, the continuous emergence of PlayFun Technology boutique games is the result of the company's strong product-centered R&D system and distribution system working together. In terms of R&D, the company continues to invest heavily, focusing on core technology and deepening the integrated transformation of R&D and operation; domestic distribution cooperates deeply with Tencent to enjoy its channel advantages; overseas distribution is continuously explored, and the distribution model that places equal emphasis on “brand+launch” is basically mature, and products such as “One Punch Man: The Strongest Man” have performed well in overseas distribution of products such as “One Punch Man: The Strongest Man”. At present, the company has basically established an industrialized R&D and refined operation system that can continuously export quality content, as well as a relatively mature distribution system at home and abroad.
Internal equity and management adjustments are basically in place to support the company's long-term healthy development. After Liu Huicheng officially became the chairman in December 2017, the company's internal structure was reformed and the three “R&D, operation, and platform” business lines were established to help the company transform from outreach development to internal collaboration and integration. It is expected that the company will continue its healthy development trend in the future. At the same time, the company's cash flow is healthy. As of 20Q3, the goodwill scale has dropped 65% compared to the end of 2016, and the risk of impairment has been partially released.
Key new products are expected to bring flexibility. The long-term growth driving company of integrated R&D and operation+global distribution has experienced internal management optimization, deepened strategic transformation, and welcomed key new products. The company's 20H2 launch “Street Fighter: Showdown” performed well, and 21H1's key new products are expected to be catalyzed. We expect the company's net profit to the mother in 2020-22 to be 618/9.13/1,152 billion yuan respectively, up 70.03%/47.63%/26.17%, respectively. The corresponding EPS is 0.22/0.33/0.42 yuan, respectively. Considering that the average PE of comparable companies in 2021 was 16X, the company was given the same PE in 2021, with a corresponding target price of 5.28 yuan, covering a “increase in holdings” rating for the first time.
Risk warning: Increased competition for purchasing volume, launch times and flows of new games falling short of expectations, loss of goodwill, etc.