We initiate with a "Buy" rating and a TP of HK$4.85. Recognizing the Company's substantial potential for profitability enhancement and its profound expertise in game development, we assign iDreamSky a 2023 PS ratio of 2.3x with a target market value of HK$6.8 bn.
　　As one of the leading game companies in China, iDreamSky （the “Company”） is poised to benefit from the industry's development in the long run. With expertise in managing games throughout their lifecycle, the Company has accumulated strong capabilities in publishing, operations, and R&D within the game industry.
　　We expect that iDreamSky’s long lifecycle games will continue to generate stable revenue, while its in-house development capabilities will periodically create new sources of revenue growth for the Company. iDreamSky excels in introducing high-quality games from overseas to China as well as publishing and operating these games after localizing and adapting them to the Chinese market. Through localization and secondary development of high-quality games from overseas, iDreamSky has accumulated extensive expertise in self-developed games and operational capabilities. This establishes a solid foundation for its self-developed game business and provides a certain advantage for its expansion of games to overseas markets.
　　We believe that after eliminating low-return game projects, the Company's in-house developed games have the potential to generate revenue growth that exceeds the market’s expectations, leading to a significant improvement in profitability in the short term. In the past few years, the Company has incurred significant losses from business attempts in different game genres, leading to market concerns about its profitability improvement.
　　However, after years of experimentation and adjustment, the Company has now identified a game development direction that supports profitability, focusing on its expertise in self-developed competitive games. The upcoming release of the brand-new in-house developed game, Calabiyau, is expected to bring tremendous commercial value to the Company. Following adjusting its business strategy, the Company has eliminated low-profit margin operations and started cultivating high-quality revenue sources.
　　Catalysts: New release of iDreamSky’s in-house developed games; positive industry reviews for the Company’s games in operations; acquisition of new game copyright approval by the Company.
　　Risks: New projects of game development may not progress as expected; uncertainties in the policy of Chinese game industry.