Performance in the first half of 2021 is slightly better than we expected.
IGG's revenue in the first half of the year was HK $3.24 billion, up 33% from the same period last year, up 7% from the previous year, and 1.5% higher than we expected, as the "Kingdom era" flow was slightly higher than expected; the adjusted net profit was HK $590 million, down 43% from the same period last year and 45% from the previous year, higher than our forecast of 3.8% due to higher-than-expected income from non-core businesses. The board declared a half-year dividend of HK14.5 cents per share, accounting for 30% of the net profit in the first half of the year.
Trend of development
In terms of released games, the number of registered users of the main product "Kingdom era" reached 440 million in the first half of 2021, a net increase of 70 million in half a year, and MAU reached a record high of 20 million, mainly benefiting from the change in user strategy to acquire new users and improve user retention. The Kingdom era earned HK $2.74 billion in the first half, up 4 per cent from a month earlier, with an average monthly flow of HK $480 million, which fell slightly to HK $450 million in June. We believe that the current guest strategy of the Kingdom era is conducive to maintaining the stability of the game system and lengthening the game life cycle; the running water in the second half of the year is expected to be 2% lower than that in the first half, mainly due to the high base in the first quarter. Time Princess entered the Japanese market in May and South Korea in July. The company expects to launch it in China on Aug. 20. At present, the game has more than 10 million registered users and more than 2 million pre-registered players in China. Princess time averaged HK $28 million a month in the first half of the year, and management is still looking forward to reaching its monthly flow target of US $10 million by the end of the year.
In terms of new games, the company is actively expanding non-SLG game tracks. "Wrath of Destiny" is a card placement game developed by an external team invested by the group and the 1GG Global Flower Operations team. It is only available in English Android, with an average daily flow of HK $200000. The company expects to launch iOS and more in the coming months. Project Mythical Heroes, which is also a card placement game, performed well in the test, and the company expects to launch within 8 months. We believe that the pipeline of such games will climb faster in the short term, or will contribute significantly in the second half of the year, especially in the fourth quarter. In addition, the company continues to work on the SLG track, with more than 30 products under development, more than half of which are SLG categories, and the company plans to launch two SLG games, "Project LW" and "Project MR2.0), in the fourth quarter.
The company actively expands its R & D team and continues to invest in external teams. The company employs 2619 people in the first half of 2021, 597 more than at the end of 2020, most of whom are R & D personnel. At present, "Princess of time" project has about 400 R & D team, "Yeager" project team has more than 100 R & D staff. In the first half of the year, the R & D expense rate increased by 3.6ppt to 15.4% compared with the same period last year, and the sales expense rate increased by 7.3ppt to 28.9% over the same period last year. We expect the R & D and sales expense rate to remain at a high level in the second half of the year.
Profit forecast and valuation
We keep our earnings forecasts for 2021 and 2022 unchanged, maintain our neutral rating, and lower our target price by 17.4% 6 to HK $10, corresponding to 10 times the adjusted PE in 2022 (originally 12 times), mainly because the valuation center of the game market is downside, which is 27.6% higher than the current stock price. The current share price is trading at 7.8 times the 2022 adjusted PE.
Risk.
The regulation of the industry is tighter; the growth of R & D expenditure is higher than expected; and the progress of the launch of new games is not as good as expected.