Preannouncing adjusted net loss Rmb0.22-0.24bn
　　Archosaur Games issued its 2021 earnings alert. The firm estimates its adjusted net loss reached Rmb0.22bn-0.24bn （vs. a net profit of Rmb219mn in 2020）， in line with market consensus. We mainly attribute the loss to: 1） disappointing performance of the new game and declining revenue caused by a delay in the release of some products; 2） rising investment in R&D, and 3） increased marketing expenses for self-developed products released in overseas markets. Meanwhile, the firm announced its new games in the pipeline, estimating that 11 new games would be launched in domestic and overseas markets over 2022-2024.
　　Trends to watch
　　2021 net loss attributable to ramp-up of R&D and delayed new game release. The firm estimates its 2021 adjusted net loss at Rmb0.22bn-0.24bn, implying a loss of Rmb0.17bn-0.19bn in 2H21. We believe the firm incurred a net loss mainly because: 1） old games recorded a natural decline in billings. Moreover, new games contributed inadequate incremental earnings due to disappointing performance of The New World and delayed release of Noah’s Heart and Project Code: Sigmar. 2） The firm continued to invest in R&D. Headquartered in Beijing, the firm has established R&D bases in Shanghai, Chengdu and Changchun to create synergies for developing more diversified games. 3） Marketing expense increased due to the release of Under the Firmament in overseas markets.
　　Games increasingly diversified; technological upgrade continues; self-developed games distribution system improves. The firm strives to offer high-quality games by constantly upgrading products. It has established R&D centers across China with two strategy card games Project Code: IM and Project Code: SE in the pipeline at its Shanghai R&D center. In addition, the firm used Unreal Engine 5 for its new games such as Project Code: Reborn and Project Code: Seed. We believe the firm’s diversified new games in the pipeline in terms of both genres （e.g. SLG and card games） and themes （expansion into female-oriented games）， should facilitate expansion of client base to unleash more growth potential. Furthermore, the firm continues to improve its distribution system for self-developed games to prepare for the marketing, distribution and operation of its new game Glamorous Secrets.
　　Self-developed new games being tested for launch; potential release of international major IP themed mobile game to help the firm go global. The firm continued its efforts in new game testing. The open world massively multiplayer online （MMO） mobile game Noah’s Heart, which will be launched in 2Q22 according to Archosaur Games, initiated its file deletion test on March 9 and recorded 840,000 registrations on its official website. Testing of the Avatar themed game Avatar: Reckoning, which the firm plans to release in overseas markets in 2022, has started in the North American market. In addition, according to the company, strategy mobile game （SLG） Project Code: Sigmar and female-oriented mobile game Glamorous Secrets （online registrations at 4.77mn） are likely to be launched within 2022. The firm released the self-developed game Under the Firmament in some overseas markets in 2021, making another breakthrough in the global market. In 2022, the firm plans to launch the international major intellectual property （IP） themed game Avatar: Reckoning in overseas markets and has multiple games in the pipeline to target global markets. We expect the overseas launch of quality self-developed games to help improve its international reputation, laying a solid foundation for its development and distribution of overseas games.
　　Financials and valuation
　　Considering the firm’s continuous investment in R&D and a delay in the release of its new products, we lower our 2021 and 2022 adjusted net profit forecasts from Rmb41mn and Rmb550mn to -Rmb233mn and Rmb394mmn, and introduce our 2023 adjusted net profit forecast of Rmb622mn. The stock is trading at 13x 2022e adjusted P/E. Based on our earnings forecast revisions, we cut our TP by 26% to HK$8.7 （implying 15x 2022e adjusted P/E）， offering 14.3% upside. Maintain OUTPERFORM.
　　Risks
　　Macroeconomic uncertainties; regulation headwinds; slower-than-expected application for game version numbers and launch of new games; unstable cooperation with third-party game distributors; weaker-than-expected overseas business.