20211228-西牛证券-家乡互动-03798.HK-An_attractive_entry_point_of_a_cash_cow_29页_1mb

Summary of Homeland Interactive Technology (03798.HK)

Core Content

Homeland Interactive Technology (03798.HK) is a Chinese mobile card and board game developer and operator with a focus on localized Mahjong and poker games. The company has established a strong presence in the market, having developed 634 mobile game products across 28 provinces and municipalities by the end of June 2021, including 556 localized Mahjong variations, 71 poker variations, and 7 casual games. As of June 2021, it achieved over 300 million cumulative registered players and approximately 8 million daily active users (DAU).

Main Business Activities

• Game Development: The company primarily develops and operates mobile games through WeChat Mini Programs and its proprietary platform, Weile Games. It has also expanded into the overseas market, with plans to target Southeast Asia, the Middle East, Japan, and Korea.
• Game Portfolio: The core game titles include "斗地主" (Fight the Landlord), "捕魚" (Fishing Strike), and "Mahjong", which are popular in China. The company is also developing mid-core games and exploring casual games for broader appeal.
• Monetization: The company monetizes through virtual tokens, in-game advertisements, and the sale of virtual items. It also introduced live video and stranger social networking features to enhance user engagement and generate additional revenue streams.
• User Engagement: The company has a diverse user base, with significant growth in DAU from Shandong, Sichuan, and Shaanxi provinces. The company's focus on localized variations has helped in catering to regional preferences and increasing user retention.

Key Financial Metrics

Target Price and Rating

• Stock Rating: BUY
• Target Price: HK$2.48
• Current Price: HK$1.75
• 52-Week Range: HK$1.40 – HK$7.41
• Market Cap. (HKD, bn): HK$2.3

Key Investment Thesis

1. Strong Horizontal Expansion Potential

• The company has tapped into most Chinese provinces but only a few are major contributors due to different marketing strategies.
• The Group has the potential to expand further by exploring new core business regions.
• Past experience with uni-platform strategy and localized marketing, along with substantial net cash reserves (~RMB 955.5mn or ~68% of total assets), supports further expansion.

2. Introduction of New Monetization Ways

• In-game Advertising: Ad slots are integrated into the Mini Program, with incentives for users who click on ads, such as free virtual items and tokens.
• Live Video and Social Networking Features: These features are designed to increase user engagement and provide additional monetization opportunities through virtual gifts and viral marketing.
• Virtual Tokens and Items: Users can purchase virtual tokens (RMB 6.0 for every 60,000 tokens) or earn them through missions and daily logins. Virtual tokens account for 71.7% of total revenue in H1 2021.

3. Adoption of Diversified Marketing Strategies

• The company uses both online and offline marketing to build brand recognition and penetrate new markets.
• Online marketing, especially through live streaming, short videos, and online competitions, has become increasingly important due to the pandemic and digital trends.
• Marketing expenses as a percentage of total revenue have been significant, indicating a strong commitment to growth.

Company Background

• Founded in 2009 as Jilin Xinze, the company expanded into mobile games in 2013 and launched its first localized Mahjong game in 2014.
• In 2015, it established Jiaxiang Interactive and launched Weile Games, its proprietary platform.
• In 2017, it set up Jilin Yuke to explore the private game room business.
• The company was listed on the Hong Kong Stock Exchange in 2019 under the ticker 03798.HK.
• In 2020, it acquired 40% of Jilin Xinyue for RMB 150.0mn to expand its operations in the northern provinces of China.

Industry Overview

• Online Games Market in China: The market size grew from RMB 233.0bn in 2019 to RMB 278.7bn in 2020, representing a YoY growth of 19.6%.
• Online Card and Board Games Market: The number of players increased to 431.9mn in 2018 and is expected to reach 639.2mn by 2023. Market size is forecasted to grow from RMB 10.5bn in 2018 to RMB 37.6bn in 2023.
• Chinese Mobile Games in Overseas Market: The market size increased by 33.3% in 2020, reaching USD 15.5bn. This growth is attributed to the suspension of online game approvals in China and the adoption of globalization strategies.
• In-game Mobile Advertising Market: The market grew significantly, with in-game advertising revenue increasing from RMB 1.8bn to RMB 19.0bn in 2020. Casual games dominate ad placements on both Android and iOS platforms.

Risk Factors and Future Outlook

• Market Expansion: The company faces challenges in expanding into new regions and overseas markets due to limited brand recognition and cultural knowledge.
• Monetization Diversification: While the company has diversified its monetization methods, the short-term monetization potential from new features is limited.
• Financial Strength: The company has strong cash reserves, which support both expansion and risk mitigation.
• Growth Potential: With a solid foundation in China and plans for overseas expansion, the company is well-positioned for future growth.

Conclusion

Homeland Interactive Technology (03798.HK) is a well-established player in the localized mobile card and board games market in China, with a growing user base and diversified monetization strategies. The company's strong financial position and experience in localized marketing and platform development support its potential for horizontal and geographic expansion. With a focus on both domestic and international markets, the company is poised for continued growth and profitability.