20171208-信达国际控股-网龙-00777.HK-Education_and_gaming_both_on_the_right_track_17页_1mb

Summary of NetDragon's Business and Performance

Core Content Overview

NetDragon is a diversified company with a strong presence in both the education and gaming sectors. The company has been actively expanding its education offerings globally and in China, while also focusing on enhancing its gaming business through mobile and emerging technologies.

Main Points in Education Segment

Acquisition of Prometheus

• Acquired Prometheus in November 2015 for ~US$130 million, a global leader in interactive learning technologies.
• Prometheus offers a one-stop interactive education solution for K-12 schools, including hardware and the ClassFlow platform.
• Presence in >100 countries and installed in ~1.3 million classrooms worldwide.
• US, UK, and Europe represent ~50%, 15–20%, and 15–20% of Prometheus's revenue, respectively.

ClassFlow Platform

• A self-developed platform with ~2 million teacher users and >1 million student and parent users.
• Provides resources for creating interactive lessons, including presentation templates, quizzes, and mobile communication tools.
• Plans to launch a social commerce function in the US to monetize the user base by enabling teachers to purchase teaching materials from other users.

PRC Education Market

• Operates under self-owned brands "Huayu (華漁)" and "101".
• Primary income source is IT solution packages provided to K-12 schools through tendering.
• Expected revenue surge from RMB180 million in FY16 to ~RMB300 million in FY17E.
• "101 PPT" is a flagship product with over 1 million teacher users as of 4Q17.
• The company is building an online education ecosystem covering pre-class, in-class, and after-school learning, as well as instant messaging.

Educational Software and Digital Content

• "101 PPT" offers comprehensive resources and templates for all standard primary and secondary school curriculums.
• "101 VR" is a VR editor with >40,000 3D materials, enabling creation of personalized VR lessons.
• "101 AR" allows self-creation of augmented reality educational content.
• The company is expanding into VR/AR and other digital tools to enhance the learning experience.

Main Points in Gaming Segment

PC Games

• NetDragon is a long-established online game developer in China, with notable IPs like "Eudemons (魔域)", "Heroes Evolved (英魂之刃)", "Conquer (征服)", and "Tiger Knight (虎豹骑)".
• PC games contributed >80% of gaming revenue in FY16.
• Revenue growth has been driven by content updates and new game launches, including the addition of MOBA elements to "Eudemons".

Mobile Games

• Mobile games are expected to accelerate from FY17E onwards, representing <20% of gaming revenue in 9M17.
• Mobile versions of "Eudemons" and "Heroes Evolved" have shown strong performance, with "Eudemons" gross billing exceeding RMB100 million in 19 days after launch.
• "Heroes Evolved" mobile version was among the top 3 downloaded games on Tencent Open Platform for 9 consecutive months.
• NetDragon plans to launch more mobile games in FY18E, leveraging its existing IPs and integrating VR/AR technologies.

Financial Performance and Valuation

• NetDragon reported RMB207 million operating profit in 9M17, versus RMB69 million operating losses in 9M16.
• The company is currently trading at a FY17E price-to-sales (P/S) multiple of 2.6X, significantly lower than the average of 9.3X for education peers, 3.8X for gaming peers, and 6.1X for other internet peers.
• The education segment is expected to improve its profitability in the coming years, with increased revenue from emerging markets and monetization of the ClassFlow platform.
• Mobile games are anticipated to contribute more significantly, potentially driving a re-rating of the company.

Strategic M&A and Partnerships

• NetDragon has acquired and partnered with several companies to enhance its technological capabilities in education, including:
  • Prometheus (interactive learning technologies)
  • Jumpstart (educational game developer)
  • ChiVox (voice and speech technology provider)
  • Cherrypicks (HK-based mobile apps developer)
  • ARHT Media (AR technology expert)
• These acquisitions and partnerships aim to strengthen its position in the education market and enable the development of more advanced educational solutions.

Key Financial Figures and Peer Comparison

• NetDragon's FY17E P/S multiple is 2.6X, significantly lower than the industry average of 6.1X.
• The company's operating profit in 9M17 was RMB207 million, up from RMB69 million in 9M16.
• The gaming segment showed strong growth in 9M17, with a 43% revenue increase and an 87% rise in operating profit.
• The education segment's revenue grew by 33% in 9M17, with narrowing operating losses.

Conclusion

NetDragon is on a positive trajectory in both education and gaming segments. The education business is gaining traction through strategic acquisitions and the development of comprehensive platforms like ClassFlow and 101 PPT. The gaming segment, while historically dominated by PC games, is evolving with mobile and VR/AR innovations, which are expected to drive further growth and improve profitability. The company's low valuation compared to peers suggests potential for re-rating as its business models mature.