20180604-兴业金融证券-网龙-00777.HK-China_Education_Facing_Challenges__Others_On_Track_9页_396kb

NetDragon Summary

Core Content

NetDragon is a diversified technology company with a focus on online gaming and education services. The company is currently facing a range of challenges and opportunities in its operations. The analysis highlights the company's financial performance, strategic initiatives, and market outlook.

Main Points

• Financial Outlook and Valuation:

  • The analyst maintains a Neutral rating with a lower target price of HKD21.90 from HKD23.16, reflecting adjusted forecasts and a reduced growth expectation for the China education business.
  • NetDragon is projected to achieve breakeven at the group level in 2018.
  • The China education business is expected to experience slower top-line growth but better margins, especially with the introduction of VR-based education solutions.
  • The Prometheus business is expected to resume growth with more sales resources and budget following its acquisition.
  • Eudemons Online is set for a mobile 3D version launch in 2019, later than previously expected in 2H18.
  • The mobile game based on Eudemons Online is distributed by Kingsoft, with monthly gross billing stabilizing at CNY30-50m.
  • The 3D version of Eudemons Online is expected to be distributed by a more powerful distributor, potentially generating higher monthly gross billing.

• Market and Business Dynamics:

  • NetDragon's online gaming and mobile gaming businesses are on track for solid growth.
  • The China education market is highly competitive, and NetDragon is focusing on revenue quality and margin improvement.
  • VR solutions are expected to enhance gross margins from 15% compared to high single-digit for non-VR solutions.
  • Prometheus is expected to win phase II and III of a recent tender win in Russia, generating revenue of CNY60m in 2Q18 and CNY20-30m in 3Q18.
  • Margins for Prometheus are expected to improve long-term, but not significantly in the short term due to lower-margin projects in Russia.

• Financial Metrics:

  • Total turnover is expected to increase from CNY2,793m (Dec-16) to CNY5,787m (Dec-20F).
  • Reported net profit is projected to grow from CNY-203m (Dec-16) to CNY192m (Dec-20F).
  • Recurring net profit is expected to increase from CNY-324m (Dec-16) to CNY192m (Dec-20F).
  • Recurring P/E is projected to decrease from 1,798 (Dec-17) to 45 (Dec-20F).
  • P/B is expected to remain relatively stable, ranging from 1.86 (Dec-17) to 1.80 (Dec-20F).
  • Recurring EPS is projected to grow from CNY-0.63 (Dec-16) to CNY0.37 (Dec-20F).
  • DPS is expected to increase slightly from CNY0.17 (Dec-16) to CNY0.18 (Dec-20F).
  • EV/EBITDA is projected to decrease from 28.6 (Dec-17) to 23.5 (Dec-20F).
  • Return on average equity is expected to improve from -5.0% (Dec-16) to 4.1% (Dec-20F).
  • Net debt to equity is projected to remain net cash.

Key Information

• Company Profile: NetDragon is a technology company with a diverse range of businesses, including online gaming, mobile solutions, and education services.
• Share Performance: The company has a market cap of USD1,390m, and its shares have experienced mixed performance over the past year.
• Shareholders: The major shareholders are DJM Holdings (46.8%) and IDG (14.6%).
• Financial Exhibits: The financial model has been updated, and the forecasts show a reduction in revenue growth and improvement in profitability.
• Valuation Metrics: The SOP-based valuation is used, with lower multiples for the China education business due to slower growth.
• Investment Recommendations: The analyst recommends a Neutral stance with a lower target price.
• SWOT Analysis:
  • Strengths: Strong cash position, first-mover advantage in online education, and ties with Baidu.
  • Weaknesses: Lack of a strong internet platform with a large user base.
  • Opportunities: Successful VR solutions, stronger-than-expected orders for interactive classrooms, and potential for higher gross billing.
  • Threats: Integration and cost optimization challenges, increasing competition in the education market.

Key Risks and Upside Potential

• Downside Risks:
  • Integration and cost optimization failure for Prometheus.
  • Stiffer competition in the education sector.
• Upside Risks:
  • Successful VR solutions.
  • Stronger-than-expected orders for interactive classrooms.

Conclusion

NetDragon is navigating a complex landscape with a focus on improving revenue quality and margins, particularly in the China education business. The company's online gaming and mobile gaming segments are on track for growth, and the launch of Eudemons Online's 3D version in 2019 is anticipated to bring higher gross billing. However, the China education market remains challenging due to intense competition and low user acceptance. The company is also facing integration risks with its Prometheus division, but has the potential for long-term margin improvement. The analyst's target price reflects these adjustments in forecasts and reduced growth expectations.