20230313-招银国际-中手游-00302.HK-Reaccelerate_on_strong_pipeline_in_FY23E_13页_1mb

CMB International Global Markets | Equity Research | Company Update Summary

Core Content

CMGE Technology (302 HK) is a leading IP-oriented game publisher in China, known for its strong pipeline and strategic positioning in the gaming industry. The company is expected to benefit from the structural recovery of the game sector in FY23E, driven by a normalized game license approval process, a robust pipeline of titles, and a focus on overseas expansion. The report resumes coverage with a BUY rating, setting a Target Price (TP) at HK$3.52, which implies a 14x and 11x P/E for FY23E and FY24E, respectively.

Main Points

• Industry Outlook: The gaming sector is expected to recover in FY23E, with a forecasted revenue growth of +7% YoY. This is attributed to regulatory easing, a strong pipeline of high-quality games, and a low base in FY22E.
• Company Strengths:
  • CMGE has the largest IP reserves in China, with 123 IPs (55 licensed and 68 proprietary).
  • The company is well-positioned to leverage its IP portfolio for adapted games and to attract a loyal user base.
  • It has a diversified revenue mix, including both self-developed and licensed games.
• Pipeline and Launches:
  • CMGE plans to launch around 20 titles in FY23E and FY24E, including self-developed games like Sword and Fairy World (仙剑世界) and Soul Land: Shrek College (斗罗大陆：史莱克学院).
  • Sword and Fairy World is a self-developed metaverse platform with potential to significantly boost the company's top line and bottom line.
  • The company expects Sword and Fairy World to be a key catalyst for growth, with a promotion video planned by end-March.
• Revenue and Profit Growth:
  • Revenue is forecasted to increase by 96% YoY in FY23E and 38% YoY in FY24E.
  • Adjusted net profit is expected to rise by 759% YoY in FY23E and 35% YoY in FY24E.
  • The company is projected to achieve a 65% CAGR in revenue and 241% CAGR in net profit from FY22 to FY24E.
• Overseas Expansion:
  • Overseas revenue is expected to grow by 227% YoY in FY23E, accounting for ~25% of total revenue.
  • The company has an overseas pipeline of 15 titles, with Soul Land: Shrek College, Sword and Fairy: Wen Qing, and The King of Fighter: All Stars expected to be key contributors.
• Margin Improvement:
  • Adjusted net profit margin (NPM) is expected to sequentially improve from 3% in FY22E to 11% in FY23/24E.
  • This improvement is driven by a shift in revenue mix towards self-developed games and overseas expansion, which reduces channel costs.
• Valuation and Catalysts:
  • CMGE's current valuation is attractive, with a P/E of 8.6x for FY23E and 6.3x for FY24E.
  • The stock has rebounded 76% from its trough in October 2022, outperforming the broader China online game sector.
  • Key catalysts for further upside include the Sword and Fairy World promotion video and blockbuster games in 2H23E.
• DCF Valuation:
  • The DCF-based target price is HK$3.52, reflecting the company's strong growth potential and improving regulatory environment.
  • The valuation is 8% to 34% lower than China peers and global peers, indicating a potential rerating.

Key Figures

• Revenue (FY23E): RMB5,350 million (+96% YoY)
• Adjusted Net Profit (FY23E): RMB601 million (+759% YoY)
• Target Price (TP): HK$3.52 (up/downside +68.4% from current price HK$2.09)
• Overseas Revenue (FY23E): Expected to grow by 227% YoY, contributing ~25% of total revenue.
• Gross Margin (FY23E): 41.0%
• Operating Margin (FY23E): 13.5%
• Net Margin (FY23E): 11.2%

Shareholding and Performance

• Shareholding Structure:
  • Fairview Ridge Investment: 25.1%
  • Pegasus Network: 10.6%
  • Bilibili: 7.2%
• Stock Performance:
  • 1-month: +0.4%
  • 3-month: +36.7%
  • 6-month: +17.6%
  • 12-month: Price performance rebounded by 76% from October 2022 low.
• Market Cap: HK$6,145 million
• Average 3-month Turnover: HK$28.22 million
• 52-week High/Low: HK$2.72 / HK$1.10

Strategic Initiatives

• Sword and Fairy World: A metaverse platform combining open-world gaming and social networking, with potential to maintain core user base and enhance user engagement.
• Diversification: CMGE is expanding its revenue streams through a mix of self-developed and licensed games, with a focus on overseas markets.
• IP Utilization: The company is leveraging its extensive IP portfolio to create new titles and maintain long-term user engagement.

Financial Summary

Figures and Tables

• Figure 1: CMGE's IP reserves
• Figure 2: Successful IP game launches
• Figure 3: China online game market size forecast
• Figure 4: Overseas revenue of Chinese game developers
• Figure 5: Revenue estimates for CMGE (2019-2024E)
• Figure 6: Rev mix trend (2019-2024E)
• Figure 7: Game publishing growth estimates
• Figure 8: Game development growth estimates
• Figure 9: Domestic business growth estimates
• Figure 10: Overseas business growth estimates
• Figure 11: CMGE key game pipeline in 2023 & 2024
• Figure 12: New game pipeline in China for 2023
• Figure 13: New game pipeline in overseas markets for 2023
• Figure 14: Key titles to be launched in FY23E
• Figure 15: CMGE rev estimates (2019-2024E)
• Figure 16: CMGE's Sword and Fairy World introduction
• Figure 17: Gameplay of Sword and Fairy World
• Figure 18: Self-developed game revenue as % of total
• Figure 19: Overseas game revenue as % of total
• Figure 20: Margin trend
• Figure 21: DCF valuation
• Figure 22: Comps table (P/E and P/S)

Conclusion

CMGE Technology is positioned to benefit from the recovery of the gaming industry in FY23E and FY24E, driven by a strong pipeline, strategic IP utilization, and expansion into overseas markets. The company is expected to deliver significant revenue and profit growth, supported by improved margins and a diversified business model. With a BUY rating and a DCF-based target price of HK$3.52, the stock is seen as undervalued, offering potential for rerating and upside. Key catalysts include the promotion of Sword and Fairy World and the launch of blockbuster games in the second half of FY23E.