Investment Summary

Perfect World engaged in Film and TV series creation as well as Gaming development in China, together with strong game development and film production capabilities. Assuming a target P/E of 23x in 2019, we derived a TP of $34.37, 0.3% higher than previous TP. We maintain a “Buy” rating, with a potential upside of 30.8%. (Closing price at 14 Aug 2019)

Interim result update

The revenue (excluding the cinema business) grew by 12.44% YoY, reaching RMB 3,656 mn. The net profit attributable to the owners was RMB 1,020 mn, up by 30.5%, while the net net profit attributable to the owners excluding the non-recurring gains and loss was RMB 973 mn, rose by 37.67%. The operating cash flow was RMB 167 mn. The gross profit margin was up from 59.6% in 18H1 to 68.6% in 19H1.

Business update

Gaming

The gaming revenue reached RMB 2,878 mn, up by 8.06% YoY. In terms of PC gaming, the performance of “Perfect World”, “Zhu Xian”, “DOTA2” and “CS:GO” all remained persistent. The Group are developing a new game, called “Xin Zhu Xian Shi Jie” based on the IP of “Zhu Xian”. In terms of Mobile gaming, the revenue boosted significantly by 39.4%, thanks to the strong performance of “Perfect World Mobile” launched in this March. It ranked the first in the IOS billboard for about 20 days. The “Legend of Condor Hero Mobile” has also launched on July along with a top ranking in IOS. The Group are still developing games, such as “Wo De Qi Yuan”, “Meng Huan Xin Zhu Xian”, “Xin Shen Mo Da Lu” and etc, which will fuel the growth in mobile gaming in the next few years.

Films & dramas

The revenue from films & dramas dropped by 22.4% to RMB 779 mn, due mainly to the sales of cinema business. In terms of dramas, the Group has launched “I Will Never Let You Go”, “Qing Chun Dou”, “In Youth” and etc. “I Will Never Let You Go” went into the top 3 in weekly drama of Zhejiang Television, while “In Youth” also ranked the top based on the CSM55 ratings. In terms of films, the Group planned to maintain its strategic cooperation with Universal Pictures on film production.

Valuation

As the revenue growth in 19H1 of PC and console gaming was lower than expected, we lower the revenue in 2019F by 8.4% to 6.4%. However, we saw a significant improvement in GPM and a good cost control in both selling and administrative expenses. As a result, we only lower the net profit growth by 1.3% to 14.3%. Assuming a target P/E of 23x in 2019, we derived a TP of $34.37, 0.3% higher than previous TP due to the previous share buyback. We maintain a “Buy” rating, with a potential upside of 30.8%.

Risk

1. Lower-than-expected growth in Mobile gaming

2. Giant entering the film & drama production

3. Loss in production team

Financials

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