3Q15: top line beats, bottom line misses
Ourgame reported its revenue increased 60% YoY to Rmb207mnin 3Q15, 6.9% above consensus; while adjusted net profits wereRmb45mn with growth at 4% YoY, missing consensus by 7.4%.
Trends to watch
Non-GAAP sector (sponsorship & video) expected tocontribute more in the near future: 1) Ourgame started toconsolidate WPT in 3Q15, we estimate its revenue (primarilysponsorship), will be ~Rmb32.5mn per quarter. And, 2) itgranted several video IP rights (two years) to PPTV forRmb20mn. Although the contribution to its top line is currentlystill small, the inventory of Ourgame’s video IP is sufficient. Webelieve video IP revenue has great growth potential, as most ofits valuable games (WPT, etc.) have not started to monetize theirvideo IP yet. Also, the higher margin video business helps themargin expansion of the overall company.
Continuous execution of online/offline business modelpays off, despite hurting short term margin. In 3Q15, WPThosted national tournaments in South Korea and China furtherenhancing its overseas penetration. It will also launch the firstWanyu E-Sports Arena in 4Q15. Short term margin will decreasedue to increased marketing and labor expenses; however, weexpect the impact will be stable and gradually improve next year.
Earnings forecast
We revise our 2015/16e revenue forecasts by+3%/-2% to Rmb749mn/1,071mn; and trim ouradjusted net profit forecasts by 9%/2% toRmb174mn/259mn, implying EPS of Rmb0.22/0.33 (orHK$0.28/0.42) for 2015/16e.
Valuation and recommendation
We reaffirm our BUY rating and maintain our TP ofHK$8.5, based on 30x/20x 2015/16e P/E.
Risks
Faster than expected deterioration of PC revenue.