What's new
We spoke with IGG management about updates on the firm's new and existing games, as well as its games R&D and marketing strategies during a non-deal roadshow that we organized on November 16.
Comments
Games performance: IGG's main product Lord Mobile still has a high number of active users and monthly gross billing remains stable. The performance of Mythical Heroes (released October 16) has exceeded the firm's estimates, with users and gross billing rapidly increasing with the user retention ratio remaining sound. Mythical Heroes has become the firm's second most popular product (as measured by gross billing). IGG believes that this game will become a main growth driver over the medium-to-long term. Gross billing for Dress up! Time Princess, released in China, Japan, and South Korea during the summer break has yet to reach the firm's estimate of US$10mn. However, the firm is upbeat on the growth potential of games that appeal more to women, and it is increasing R&D investment in such products. IGG is fine-tuning gameplay, improving the game’s content and planning to roll out major updates in 2022. IGG expects a limited number of users for the hard-core game, Rage of Destiny, and its popularity remains uncertain, as IGG only conducted a limited number of tests during R&D. IGG expects to launch Project LW and Project MR2.0 in 2022.
Games R&D: IGG is expanding its R&D team and trying to hire R&D employees in Shanghai and Chengdu. The firm expects its R&D strength to improve notably, and it has fine-tuned its R&D strategy, conducting tests at the early and medium term R&D stages to ensure that the gameplay and art style appeal to users at launches. IGG believes that data and experience accumulated in the process of testing games is essential in developing follow-up products.
Games marketing: IGG's marketing investment hinges on the gross billings of specific games and their growth stages. The firm increases investment in games that are in early growth stages and have sizable growth potential. As well as advertising, IGG attaches importance to brand marketing. It has increased the popularity of the IGG brand by cooperating with key opinion leaders (KOL) on different platforms and utilizing its own tool product portfolio. We think that its marketing investment will rapidly increase in 1H22, as the firm rolls out additional products and launches games in more languages. IGG says that the impact of overseas ad competition and Apple's IDFA policy on the firm's ad cost is limited. Its cost per user remains at an industry low, thanks to its extensive experience in distributing games overseas, its localized operation capability, and its efficient channel management.
Valuation and recommendation
We keep our revenue and earnings forecasts for 2021 and 2022 unchanged, as performance of new games remains to be seen. We maintain NEUTRAL and our target price of HK$10 (10x 2022e adjusted P/E), offering 26% upside. The stock is trading at 7.9x 2022e adjusted P/E.
Risks
Launches and/or performance of new games fall short of expectations; marketing and R&D expense ratios exceed our estimates; regulatory risks.