This company, which primarily develops, operates, and licenses interactive online entertainment content and services on personal computers and mobile devices earning revenue by item-based, has been grouped into PC &mobile game sector in toys and gaming industry.
It seems that the demand (china market mainly)for online PC platform-based gaming products provided by companies in this sector has been declining quickly in the past several years as indicated by more than 20% annual decrease in organic revenue of PC game according to the typical companies in this sector. The decline seems to be a result of decrease in both active users and paying users. At the same time, demand for online mobile games has been growing during the same period of time. Companies’ revenue from their mobile products has been seen increasing quickly in 2018.
However, as companies increasingly rely on revenue of their mobile products, the shorter cycle of mobile games creates huge challenge and risks for current game companies in terms of conducting marketing strategy, allocating profit with network and mobile partners, saving costs, and improving efficiency. Their profitability has been facing pressure. The typical gross margin is about 72%, SG&A is about 19%, R&D is 23% and operating margin is about 31% in 2018. The typical enterprise cash flow/EBI ratio is 16. The average annual increase in EBI/share was flat in the past two years.
It seems that the demand for interactive online PC gaming product of this company has been shrinking as indicated by the decrease in PC users. The demand for mobile platform products of this company seems to be strong as indicated by increase in number of users. However, the demand fluctuated as a result of limited number of mobile games of this company and shorter life of time of mobile game.
The 2017 compared with the 2016
Organic revenue decreased.
The 2016 compared with the 2015
Organic revenue increased 21% due to increase of 20% in online mobile game revenue as a result of increase in quarterly payment users.
The 2015 compared with the 2014
Organic revenue decreased 28% due to decrease of 27% in online PC game revenue as a result of decrease in quarterly payment users offset by increase in spending per user.
Its gross margin (68%) has been improved due to decreased amortization of intangible assets as a result of impairment of those assets and due to increased revenue as a result of one time reorganization of remaining license fees of one terminated game. With improved SG&A as percentage of sales (down to 160%) and R&D percentage of sales (down to 63%), we see an improved operating margin (up to -155% in 2018). The average EBI/share increased to -140% in 2018.
Stock performance
This company is having an enterprise price/sales ratio of 13. Considering this company ‘debt burdens, especially its redeemable non-controlling interest, and its growth in sales, we think its stock is losing investment value.
