Ourgame was established in 1998 and was listed on the main board of Hong Kong Stock Exchange on 30 June 2014. Ourgame is the leading developer and operator of online card and board games in China, with more than 400 million registered users. The Company has more than 200 kinds of card and board games, mahjong, leisure games, with product lines covering client-end, webpages and mobile terminals.
Online games have steady growth
Ourgame's growth of income is mainly contributed by its online PC and mobile games, among which a majority of income (over 90% in 2015H1) comes from three signature games, namely Texas Hold`em, Mahjong and Fight the Landlord. Income growth was driven by the virtual currency spent by game users on virtual products. Virtual currency was bought by paying users with real money, with payment channels mainly include online banking, mobile operators and pre-paid cards.
From 2011 to 2014, the revenue of Ourgame increased from RMB 154 million to RMB 476 million, with a CAGR of 46%; while net profit rose from RMB 21 million to RMB 97 million, with a CAGR of 66.5%. From 2011 to 2014, the average level of gross profit margin was 67.8%, the average operating profit margin was 19.1%, and the average net profit margin was 15.8%; which demonstrated the feature of online games having higher profitability. Benefiting from the booming growth of income from mobile clients, Ourgame's revenue and net profit in 2014 recorded yoy growth of 101% and 178% respectively; while income from mobile client end surged 882% yoy. Number of active users recorded a growth of 27%, to 26 million users; while number of paying users increased 159%, to 0.94 million users.
In the previous quarters, Ourgame's paying rates (monthly paying users divided by monthly active users) of PC and mobile segment showed persistent growth. Paying rate of PC rose from 2.1% recorded in 2013Q1 to 3.5% in 2015Q2, while paying rate of mobile segment increased from nearly 0 in 2013Q1 to 8% recorded in 2015Q2. The increase in paying rates effectively boosted the Company's business growth. As a comparable competitor of Ourgame, Boyaa Interactive (434.HK)'s paying rate of PC is apparently lower than Ourgame (2% vs 3.5%), but its paying rate of mobile segment is as high as 12%, surpassing the figure of Ourgame 50% approximately, reflecting the paying rate of Ourgame's mobile segment still has big room for potential growth.
The mode of O2O shaped comparative advantages
Ourgame has adopted the O2O strategy to attract users to play games online through organizing a variety of offline competitions. Since 2012, Ourgame organized offline competitions, for example, the WPT National China Sanya Tournament (Texas Poker Tournament) organized annually in Sanya of Hoinan has been a great success, with an average of 1.2 million participants joined the online qualification competition every year. In June 2015, Ourgame acquired the whole equity of “WPT” brand from BWIN with a consideration of USD 35 million. This will enhance the business development of online games, competition organization and tournament broadcasting in a higher horizon. This acquisition is expected to complete in two years.
Ourgame's competitor, Boyaa Interactive, also put effort on developing business of offline tournaments. We consider that Ourgame has the advantage of being innovator, and also the brand recognition of WPT. Therefore, Ourgame has comparative advantage in O2O strategy. Moreover, Ourgame also bought the shares of a high-end internet café, Wangyuwangka. Such act may help to enhance the Company's offline advantageous position, and lay the ground for further development of offline business.
Income from mobile segment kept high-speed growth in 2015Q3
Ourgame's income in 2015Q3 grew by 60% yoy to RMB 207 million; the adjusted net profit reached RMB 45 million, with a yoy growth of 4%. During the period under review, the income from mobile segment (RMB 90 million, grew by 84% yoy) exceeded the income from PC segment (RMB 86 million, grew by 9.2% yoy). The monthly active users of signature mobile games (Texas Hold`em, Mahjong and Fight the Landlord) all recorded substantial growth, reaching 100%, 16.5% and 19% respectively. The monthly paying users of mobile platform increased by 171%, reaching 1.45 million recorded in January to September in 2015, in comparison to 534,000 recorded in the same period in 2014. Thus, paying rate of mobile segment reached 7.5%. The ARPU increased by 3.0% and reached RMB 20.3 in January to September in 2015, in comparison to RMB 19.7 recorded in the same period in 2014.
Narrow sources of income;
Time for consolidating WPT brand is longer than expected;
Keen competition in the online game industry.
In the future, the highlights of Ourgame include the following: WPT's positive influence on Ourgame's game eco-system (for example, increase in the overseas market penetration rate of online business, sponsorship income from tournaments etc.) and the growth potentials of income from game video IP, as well as the mind sports eco-system created by Wangyu electronic tournament hall. We are positive on Ourgame's growth strategy of integrating online and offline. We recommend a “Buy” rating for Ourgame and set the 12-month target price as HKD 8.2, which is equivalent to 24x P/E in 2016. (Closing price as at 25 Nov, 2015)
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