Preannounced 2021 net profit down 80-90% YoY
　　IGG announced its 2021 profit alert on January 7: The firm expects its 2021 revenue to increase 10% YoY and net profit to fall 80-90% YoY.
　　Trends to watch 2H21 revenue under pressure; contribution from new games yet to be
　　seen. We expect the firm’s 2H21 revenue to fall 8% YoY to HK$2.79bn, and full-year revenue to grow 10% YoY to HK$6.03bn in 2021. We attribute the revenue decline in 2H21 to the disappointing performance of Lord Mobile, and longer-than-expected testing and optimization of new games.
　　The firm’s plan to enhance marketing of Dress up! Time Princes has been postponed to January 2022. IGG is fine-tuning the gameplay and improving the game’s content. According to App Annie, the game’s downloads keep growing. However, we suggest watching user recognition of the game, due to the high requirements for sustained content output base on the storybook gameplay. We expect the game’s gross billings to fall from the level seen in 1H21. The number of users and gross billings of Mythical Heroes have been growing rapidly after it was launched on October 16.
　　However, the game didn’t contribute much to the firm’s 2021 gross billings, as the firm is still optimizing and adjusting it. We expect the game to generate incremental revenue in 2022. The firm plans to launch Yeager,
　　Rage of Destiny and Project MR2.0 in 2022.
　　IGG expects its adjusted net profit to decline sharply in 2021 due to
　　the following reasons: 1） The firm expects its gains from other financial assets to plunge 90-100% YoY in 2021, given one-off gains in 2020 from its equity investment in X.D. Inc and a sharp drop in investment income in 2021 due to market fluctuations. 2） The firm expects its R&D expenses to surge 75-85% YoY in 2021, mainly due to increased investment in R&D to enrich the product portfolio and expand the R&D team. 3） IGG expects its selling expenses to rise 30-40% YoY, as the firm continued to vigorously promote its main product Lord Mobile, while the promotion of news games lagged behind schedule. According to management, the firm’s long-term growth will benefit from its continuous investment in R&D to improve user experience, despite the sharp YoY decline in 2021 net profit. Considering an expanding R&D team and uncertainty over revenue from new games, we expect the firm’s R&D expense ratio to increase 7.7ppt YoY to 20.3%, selling expense ratio to rise 5.6ppt YoY to 31.9% and adjusted net profit to　　decline 79% YoY to HK$439mn in 2021.
　　Valuation and recommendation
　　Given the slower-than-expected promotion of new games and lower-than-expected revenue from Lord Mobile, we trim our 2021 and 2022 revenue forecasts 8% and 3% to HK$6.03bn and HK$6.54bn. We lower our 2021 and 2022 adjusted net profit forecasts 55% and 45% to HK$439mn and HK$660mn, due to the higher-than-expected investment losses and expenses. We introduce our 2023 earnings forecast. We
　　maintain NEUTRAL. We cut our TP 45% to HK$5.5, implying 10x 2022e
　　adjusted P/E with 8% upside. The stock is trading at 9.2x 2022e.
　　Risks
　　Launches and/or performance of new games fall short of expectations; marketing and R&D expense ratios exceed our estimates; regulatory risks.