2H21 revenue 1% higher than upper end of profit alert
　　Revenue at IGG fell 7% YoY in 2H21 to Rmb2.81bn, 1% higher than upper end of profit alert, as gross billings from new games slightly beat expectation. The firm’s core game business saw a net loss of HK$64.5mn (loss ratio at 2.3%), vs. a profit of HK$538mn in 2H20. We attribute the sharp earnings decline to significantly increased sales and R&D expenses.The Board recommends not paying a second interim dividend for 2021, given the intensifying sector competition and the 2H21 loss.
　　Trends to watch
　　Gross billings of LM remains under short-term pressure from　external negatives. As of 2H21, Lord Mobile had 490mn registered users, a net increase of 50mn in six months. However, the monthly active users (MAU) dropped 40% HoH to 12mn, as the firm was less vigorous in attracting users during the peak e-commerce season. Revenue from game business fell 17% HoH in 2H21 to HK$2.28bn and full-year monthly average gross billings improved only slightly YoY to HK$440mn. In 2022, losses in the Russian market have continued expanding due to intensifying competition overseas and the impact of the Russia-Ukraine conflict. Monthly average gross billings in 1Q22 slipped to HK$380mn. The firm foresees a loss of nearly HK$200mn in 2022 if external headwinds persist. IGG is trying to recover gross billings by introducing new gameplay and increasing marketing spending. Given the recent external uncertainties, we expect 2022 revenue from LM to decline 15% YoY to HK$4.27bn.
　　Performance of new games disappointing. The MAU of Dress up! Time　Princes reached 1mn in December, and its 2021 monthly average gross billings totaled about HK$28mn, with the 2H21 billings slipping slightly.IGG is still fine-tuning the gameplay and improving the game’s content.The firm launched Mythical Heroes in October 2021, and its gross billings approached HK$30mn in November. However, IGG stopped large-scale promotion of the game in December due to disappointing player retention, and its gross billings dropped to HK$10mn in February. The firm stated that it has shifted its focus to the development of game content. We expect IGG to increase promotion the game once the new version comes online in April.
　　The firm expects to launch Yeager in 3Q22, and feedback from test players is positive. IGG plans to launch Project OG and Project MR2.0 in 2022 and reports more than 20 products in the R&D pipeline, half of which are simulation games (SLG) as well as female-, action-oriented, and idle games.
　　The selling expense ratio increased 6.2ppt YoY in 2H21 to 36.2% and the R&D expenses ratio rose 13.6ppt YoY to 26.9%, mainly due to the launch of new games and the continued expansion of R&D team. Given the uncertainties, we expect 2022 revenue to decline 14% YoY, with the sales and R&D expenses ratios standing at 40% and 27%. We expect the core game business to see a net loss of HK$420mn in 2022, with a net loss ratio of 8.1%.
　　Financials and valuation
　　As revenue from existing games is under pressure and the uncertainty　over new games is high, we lower 2022 revenue forecast 21% to HK$5.18bn and lower 2023 revenue forecast 24% to HK$5.21bn. We cut our 2022 adjusted net profit forecast to a net loss of HK$351mn from a net profit of HK$660mn and lower our 2023 adjusted net profit forecast 40% to HK$472mn. We maintain NEUTRAL. Considering our earnings forecast revision, the launches of new games since April and the stable long-term product quality of Lord Mobile, we trim our TP 13% to HK$4.8 (implying 12x 2023e adjusted P/E) offering 21% upside. The stock is trading at 10x 2023e adjusted P/E.
　　Risks
　　Disappointing launches and/or performance of new games; higher-than- expected costs and/or expenses; geopolitical and regulatory risks.