-IGG¡¦s 3Q revenue grew 132% yoy and 9.1% qoq, gross profit increased 121% yoy and 7.4% qoq. Profit attributable to shareholders up 303% yoy, while decreased 6% qoq.
-GPM further dropped to 70.8% while NPM sharply down to 34.8% from 40.3% in 2Q, still higher than the 31% in 1Q.
-The company missed the game launching schedule. Only 1 self made game, 1 third party game and 1 social app were published in 3Q.
-Due to the release of 2 impressive new self made mobile games in October, we decide to wait until the 4Q results. We maintain IGG¡¦s rating as ¡§Accumulate¡¨ with the same target price of HK$ 3.95.
Financial Highlights
The 3Q revenue for IGG amounted to US$ 52.2 mn, grew 132% yoy and 9.1% qoq. The speeded up on qoq revenue growth of Castle Clash (3Q: 13.5% vs 2Q: 5.4%) offset the slowing qoq growth on other mobile games (3Q: 15% vs 2Q: 60%). The gross profit increased 121% yoy and 7.4% qoq to US$ 36.9 mn, with GPM further dropped to 70.8%. Profit attributable to shareholders up 303% yoy to US$ 18.1 mn, while decreased 6% qoq. Diluted interim earnings per share amounted to US$ 1.27 cent.
How we view this
The revenue was in line with our expectation. 3Q revenue growth was about the same as 2Q (3Q: 9.1% vs 2Q: 8.6%), which suffered from serious declining when compared with the 20.1% quarterly growth in 1Q. The slow revenue growth in both 2Q and 3Q was with the same reason: lack of new games launching. In 2Q, there were only 2 third party games released, while in 3Q, only 1 self developed game, 1 third party game and 1 social networking application were published. However, 2 self developed mobile games ¡V ¡§Clash of Gangs¡¨ and ¡§Gods Rush¡¨ had been delayed the launching to Oct. We had searched for the above two games on Google Play and found that they were both very impressive to players. In about one month since launching, both of the games obtained over 1 million downloads, with very good comments and over 4-star ratings.
Investment Action
Although both the 2Q and 3Q financial figures showed the slowing down of revenue growth, we still believe that the company would be able to shift the revenue contributor from Castle Clash to other games. As mentioned above, the two new self developed games may be the growth drivers in the future and we will wait until the 4Q results for these two games. Thus, we maintain IGG¡¦s rating as ¡§Accumulate¡¨ with the same target price HK$ 3.95, equivalent to 10x/8.9x of 2014 and 2015 forecasted EPS plus interim net cash of HK$ 0.46 per share.
The QoQ growth slowed down, margins narrow
Both the revenue and net profit growth suffered serious declining from the peak in 4Q2013 due to the high base generated from the publishing of Castle Clash in July 2013. Net profit growth was more fluctuated, which dropped to -6% in the 3Q2014.
The gross profit margin was slightly dropped in each quarter while EBIT and net profit margins started narrowing from the peak in 2Q. The yoy increase of sale & marketing, admin and R & D expenses were 130%, 62% and 81% respectively, coupled with slowed revenue growth, implied higher cost to revenue ratio.
Game launching schedule missed
In both 2Q and 3Q, the company missed the game launching schedule. Only 2 third party games were published in 2Q.
According to the interim report, IGG planned to release 4 self developed games, 1 third party game and 1 social networking application in 3Q. However, there were only 1 self made game, 1 third party game and 1 social app launched in 3Q.
The launching of 2 self developed games ¡V ¡§Clash of Gangs¡¨ and ¡§Blood and Blade¡¨ were delayed until the 4Q, while 1 new game ¡§Gods Rush¡¨ was also published in October.
After searched on the Google Play, we found that ¡§Clash of Gangs¡¨ and ¡§Gods Rush¡¨ received very good comments and over 1 million downloads in just one month time.
Clash of Gangs
A combat strategy game which similar to Castle Clash with gangs theme. Graphics improved with 3D layout.
Gods Rush
A scrolling RPG strategy game alike the famous Chinese game DOTA Legend with myth theme.
Potential Risks
-The growth on Castle Clash slow down;
-Game launching missed schedule;
-Fail to carry on the growth with new games;
-Potential dilution of 83mn stock options, accounted for 6% of outstanding stake.
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