After the performance performance of Flying Fish, we think the market overreacted to the performance of Flying Fish before.
Through cooperation with Tencent and Qihoo 360, we expect that Flying Fish's two games, "defend Radish 3" and "Shenxian Road 2", will make a significant profit contribution in the second half of 16 to fiscal year 17.
The acquisition of Veewo will help enrich Flying Fish's casual game portfolio in the medium term. Due to the slight delay in the launch date of "Shenxian Road 2", we have lowered our forecast for fiscal year 16 by 7%. Repeat the purchase, based on a price-to-earnings ratio of 9 times forecast earnings for FY17, with a target price of HK $1.80.
Interim results are in line with expectations
After Flying Fish issued a profit warning in July 16, the interim results were broadly in line with expectations. Revenue decreased 53% to 95 million yuan compared with the same period last year, due to: first, the existing games are at the end of the announcement cycle; second, the launch of new games has been delayed; and third, the revenue contribution of the newly launched casual game "defend radish 3" is less than a month. Excluding share remuneration and other one-time items, the actual net profit in the first half of 16 was RMB 13 million, a decrease of 88% over the same period last year, which is in line with our expectations.
The sequels of two games drive growth.
Defense radish 3 still ranks among the top 10 games in China in terms of downloads more than two months after its launch. We believe that "Fairy Road 2", as a sequel to Flying Fish's best-selling franchise "Immortal Road", will be released on Qihoo 360 in the fourth season of 16th as planned. With the large user base, excellent marketing ability and strong cash realization ability of Tencent and Qihoo 360, the above two game sequels are expected to make a significant profit contribution from the second half of 16 to fiscal year 17. Apart from these two games, lost Journey 2 and lost three Kingdoms are making good progress and are scheduled to be launched in the fourth quarter of 16 and fiscal year 17, respectively. In order to consolidate its market position, Flying Fish acquired casual game developer Veewo in July 16. Veewo specializes in the game "Super Phantom Cat" has been on the Apple Store's list of editors in more than 160 countries. We believe that this acquisition will enrich Flying Fish's casual game portfolio and have the opportunity to replicate its past successful experience in "defending radish" pan-entertainment peripheral products.
Repeat the purchase and keep the target price at HK $1.80.
It is expected that "Shenxian Road 2" will be launched in October-November 16, contributing less than three months to the profits of fiscal year 16. Therefore, we have lowered our forecast for fiscal year 16 by 7%, leaving the forecast for fiscal year 17-18 roughly unchanged.
According to our forecast, the current price of flying fish is equivalent to 10 / 7 times the forecast price-to-earnings ratio of 16x17, a discount of 33% to 38% of the industry average. However, as one of the few game developers in China with a record of boutique IP and popular style products, we think the valuation of Flying Fish is on the low side. Our target price is based on the fact that the price-to-earnings ratio for fiscal 17 remains unchanged at 9 times forecast earnings. The main catalyst is the realization of popular styles after the launch of "Shenxian Road 2" and "lost Journey to the West 2". The main risks include further delays in the launch of new games, higher-than-expected employee compensation, and implementation risks in game publication and distribution.