2Q15 telco impact limitedOurgame reported 2Q15 revenue of Rmb161mn (+41% YoY,-2% QoQ), missing consensus/our estimates by 7%/4%, due totelco policy impact, which led to a 16% sequential decline in
mobile revenue. Adjusted NI of Rmb44mn was roughly in linewith expectations, while adjusted NPM improved 2.8ppt from24.6% in 1Q15 to 27.4%, thanks to the 8.2ppt increase in GPM.
Trends to watchTelco policy had limited impact on mobile payments. Itsmobile revenue has recovered since June, and was less impactedthan its peers’ thanks to its operational flexibility. In 3Q15, weexpect mobile revenue will recover to at least 1Q’s level, and full2015 to still see triple-digit growth, thanks to its improved payingratio (7.9% in 2Q15 vs. 7.1% in 1Q15, management targets10%), incremental from Texas Hold’em (launched early-2015),and non-card & board casual games to be launched in 2H15.
Distribution channels diversifying, with traffic from handsetapp store rapidly ramping up, thus reducing its reliance on theAndroid app store, which we regard as encouraging. In 2H15,watch: 1) roll-outs from September, which can attract activeusers, increase paying ratio & ARPU, as well as attractsponsorship; 2) synergies in collaboration with WPT, to furtherenhance Ourgame’s foothold in overseas markets; 3)cooperation with Board & Card Game Admin. Center in unifiedmembership system, education and training products education;4) cooperative products with Migu of China Mobile; and, 5) newflagship Internet café jointly conceptualized and constructed byOurgame and Wangyu Internet Café in 3Q15.
Valuation and recommendationLift 3Q15/2015e revenue 3.8%/1.3%, and adj. NI0.3%/0.5%, to reflect earlier-than-expected recovery fromtelco payment policy impact, but lift R&D assumption on talentrecruitment for new endeavors. Maintain BUY, but slash TP27% to HK$8.5, to reflect systematic risks over decreasedliquidity premium. Our TP represents 28x/20x 2015/16e P/E,based on 32%/38% NP growth (top line +53%/+49% YoY).RisksFaster than expected deterioration on PC revenue.