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 continuing decrease in PC platform players and PC platform spending (number of both active accounts and active paying accounts declined since 2015). Accordingly, PC platform revenue went down as well (average 10-30% declines annually). The demand for mobile platform products of this company seems to be growing as indicated by increase in mobile platform players and spending (number of both active accounts and active paying accounts increased largely in 2017). According, mobile platform revenue increased quickly (78% growth in 2017).
The 2017 compared with the 2016
Net revenue increased 10.5%.
Online game revenue increased 13.6%.
PC game revenue decreased 12.7%.
Mobile game revenue increased 78%.
The 2016 compared with the 2015
Net revenue decreased 31%.
Online game revenue decreased 38%.
PC game revenue decreased 29%.
Mobile game revenue decreased 42%.
The 2015 compared with the 2014
Net revenue increased 0.8%.
Online game revenue decreased 2.5%.
PC game revenue decreased 20%.
Mobile game revenue increased 207%.
Its gross margin was flat at around 72% since 2015 primarily because increase in cost of cinema advertising was offset by decrease in mobile app stores. With improved SG&A as percentage of sales (down to 19% due to stuffing cutting and less spending on marketing and increased sales), we see an improved operating margin (up to 31% in 2018). The average EBI/share increased to 20% in 2018.
Stock performance
This company is having an enterprise price/EBI ratio of 16. We think that its stock is being relatively undervalued.
